Markets Reverse as Tech Retreats, Small Caps Shine Amid Rotation

Markets stumbled Tuesday as investors rotated out of mega-cap tech into value and cyclical names, dragging the S&P 500 and Nasdaq lower. Despite index losses, underlying breadth was stronger: small caps and equal-weighted indexes outperformed. The tech-heavy Nasdaq slid 1.6%, driven by steep losses in software stocks, while value sectors benefited from rising economic optimism and geopolitical tailwinds. Commodities rebounded, with gold and oil rallying sharply, and investors appeared more cautious but not risk-off.

Key Headlines & Market Movers:

• Rotation from Growth to Value Intensifies: A clear rotation out of tech, especially software, accelerated with the iShares Expanded Tech-Software ETF down 4.6%. This follows Anthropic's automation developments, raising concerns about AI disrupting core software businesses. Meanwhile, economically sensitive sectors like energy and industrials rose. The Russell 2000 gained 0.3% as investors shifted toward value and cyclical plays amid growing confidence in U.S. economic resilience.

Tech Hit Hard Despite Palantir Beat: The “Magnificent Seven” all fell, including Microsoft (-2.9%) and Nvidia (-2.8%), even as Palantir surged nearly 7% on a strong beat-and-raise quarter. Gartner tumbled 21% on weak guidance, and concerns linger around tech firms' AI-linked capex with uncertain ROI. The rotation suggests investors are becoming more selective in AI exposure, favoring application and infrastructure beneficiaries over lofty-growth names.

• Gold, Oil Rebound on Risk Sentiment Shift: Gold surged nearly 7% and oil climbed 3% after geopolitical tensions flared in the Middle East, including a US-Iran drone incident. Safe-haven demand returned after last week’s historic plunge in metals, while rising oil supported energy stocks. Despite lower Treasury yields and a weaker dollar, markets still appear optimistic on underlying economic momentum, reflected in small cap resilience.

Fed Tone Signals Rate Cuts Ahead: Fed officials leaned dovish, with Governor Miran signaling additional cuts ahead due to tame inflation. Richmond’s Barkin noted easing is already bolstering the labor market. Yields were little changed, with the 10-year at 4.27%. The Fed's tone supports broader equity strength, particularly in rate-sensitive areas like small caps, financials, and housing-related names.

S&P 500 Sector Performance

Looking Ahead

The market’s internal churn continues, with clear signs of a rotational bull market taking shape. Investors are pivoting toward sectors tied to economic acceleration, while staying wary of inflated tech valuations amid AI monetization uncertainty. This week’s earnings from Amazon and Alphabet could reset sentiment on AI profitability. Diversification remains crucial as leadership rotates and macro crosscurrents persist.

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