Many investors may be concerned about what happens after the tech rally ends.
A key characteristic of this month has been the rotation out of tech stocks and the surging interest in small-cap stocks. With tech stocks making up a substantial portion of broad market indexes, investors may wonder what the end of a tech rally means for the market.
There are two options for how the market will handle the end of the tech rally, according to Natixis Investment Managers. Investors will either rotate to other segments of the market or sell and move to the sidelines in cash.
“We believe rotating into other sectors of the market would be a positive for the broader markets,” Natixis wrote. “Breadth would widen out and support a broad-based rally.”
Due to tech’s significant weight, the headline index level may decline. However, other segments of the market will still offer gains, according to the ETF issuer. This might include value, cyclicals, and equal-weight indexes.
In short, during a sector rotation, the bull market would continue, but gains would be found in sectors other than tech.
On the other hand, investors could potentially sell and move to the sidelines in cash. This would be a negative for the market. Similar to a sector rotation, tech would likely lead the market lower. However, according to Natixis, other market segments would also weaken, as no new buying would come in from the tech proceeds.
The End of the Tech Rally? What the Evidence Shows
According to an analysis from Natixis, beginning in April 2024, the market appears to be rotating rather than outright selling when profit-taking sessions are driven by tech selling.
According to the firm, investors have been selling tech names and buying other market sectors. This trend may not continue, but for now, it indicates that investors still want exposure to the equity market.
As other sectors outside tech put up healthy returns in the wake of previous tech-driven profit-taking sessions, it seems the market can tread water at the index level. Furthermore, investors may be able to find gains in other segments of the market if tech leadership cools.
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