As the "core engine" of this round of US stock bull market, the "seven giants" of the US stock market have evaporated a total of $1.1 trillion in market value in the past five days, setting a record for the largest decline in market value in five days in nearly two years. Although Wednesday's sharp decline was due to the sudden impact of Trump's speech on chip stocks, everyone cannot help but raise the following question:
Has the major rotation of the US stock market already begun? Has the tech giant that has dominated the market in the past two years reached its limit?
Some industry insiders are currently turning their attention back to the "starting point" of the five-day "disaster market": last Thursday.
In a recent report, Jim Reid, head of global economics and thematic research at Deutsche Bank, described it as a "fascinating day"
How special is this day?
On that day, 396 stocks in the S&P 500 index closed higher, while the weighted index rose by 1.17%. The small cap Russell 2000 index (+3.57%) achieved its best performance since November 2023. However, the overall S&P 500 index fell by 0.88% on the same day, which is the largest gap between the performance of the S&P 500 index and other weighted indices since Pfizer announced the preliminary results of the vaccine phase III clinical trial in November 2020.
Of course, the more obvious driving signal for the start of the big round may also be the performance of the "Big Seven" in the US stock market - the "Big Seven" fell 4.26% last Thursday, the largest decline since October 2022 (a month before the launch of ChatGPT). Even the research director of Goldman Sachs admitted that the absurdly high share prices of the "Big Seven" were the result of the artificial intelligence foam.
All of this ultimately evolved into yesterday, further evolving into a sharp drop in the Nasdaq 100 index - which hit its largest single day decline since 2022 on Wednesday.
Reference in the Internet foam
Regarding this, Deutsche Bank's Reid stated that only "very brave or foolish people" may have confidence in the idea of a big round, but the current situation does remind me of the trend in 2000, when the peak hit by technology stocks marked a huge round and the market had not yet begun to truly plummet.
To emphasize this point, Reid shared the following figure, which shows the five sectors with the largest performance differences in the S&P 500 index before and after the Internet foam burst in March 2000. The vertical line in the chart represents the peak of technology stocks on March 27, 2000, and uses the price at that time as the benchmark value (100) to measure the changes in the rise and fall of all sector indices before and after.
Reed stated that defensive sectors such as essential consumer goods, healthcare, and utilities had been experiencing significant declines before the tech stocks peaked, indicating that the market was rotating away from seemingly stable and "dull" stocks and instead investing in dynamic stocks; In fact, many people initially shorted these "dull" sectors in order to invest more funds in technology stocks.
However, when technology stocks peaked on March 27, 2000, funds immediately returned to these defensive stocks, and by the end of the year, their prices had risen by 35% -45% compared to March!
Interestingly, in terms of the overall S&P 500 index, although the index dropped by 10% within three weeks after the foam peaked, by September of that year, it had returned to the high point near the Internet foam, although the technology and telecommunications industries fell by -10% and -25% respectively.
Afterwards, the decline in these two industries further widened, leading to a larger pullback in the S&P 500 index, but the three defensive industries continued to rise.
It was not until 2001 and 2002 that deeper market declines occurred, which coincided with the then US economic recession and corporate fraud scandals such as Enron and WorldCom. These scandals may only happen under the fanaticism of the first technology foam (aside: this can't help but make people wonder what huge corporate fraud will occur once the AI foam bursts).
In the end, the technology and telecommunications industries evaporated approximately 85% and 75% of their market value, respectively, from their peak at the time to the low point at the end of 2002. Compared with the peak value of the Internet foam in March 2000, the share price of the consumer staples still rose by 25%. Therefore, as Reed pointed out, the final market rotation is significant!
Current insights
The history lesson ends here: bulls may immediately say that the Internet foam is completely different from the current AI foam, because there were almost no technology companies in the foam at that time, with viable business models and anything similar to positive cash flow. Indeed, from this perspective, this time is different:
Most of the "Big Seven" are "cash cows" that generate billions of dollars in cash every quarter. More importantly, their revenue and bottom line growth rates are much faster than the other 493 stocks.
Regarding this, Reed also acknowledged that the divergence in performance between the "Big Seven" and other stocks reflects the difference in profit growth achieved recently. The former achieved a year-on-year growth of 38% in the first quarter, while the latter (i.e. other industries) only achieved a year-on-year growth of 2.5%.
However, Reed also mentioned in the report that it is expected that this huge profit growth gap will narrow in the second quarter and before the end of the year - the year-on-year growth rates of the two are expected to be 30% and 7.5% respectively in the second quarter; By the end of the year, this gap will even be completely eliminated, and the year-on-year growth rates of both sides are expected to reach around 10%. Position adjustments should also follow and have a related impact on industry rotation.
Therefore, Reed's conclusion is that most stocks are likely to rise before the end of the year, while the US stock market (index market) is likely to decline