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The Nasdaq Composite Index (NASDAQ: .IXIC) took a sharp turn for the worse yesterday (overnight Aussie time).
By the time the smoke cleared, the tech-heavy index had ended the day down 2.0%.
Remarkably, the big Nasdaq sell-off came on the heels of some very promising inflation data out of the United States.
According to the US Bureau of Labor Statistics, inflation in the world’s top economy increased 0.1% in June from May. That’s the slowest inflationary increase in three years.
This news, as you’d expect, increased market expectations of a September interest rate cut from the US Federal Reserve. An expectation that has often offered significant tailwinds for tech stocks.
Yet the Nasdaq Index tumbled, pulled down by some of the world’s biggest and best-performing tech giants.
Shares in Apple Inc (NASDAQ: AAPL), for example, closed 2.3% lower. Alphabet Inc Class A (NASDAQ: GOOGL), or Google to you and me, shed 2.9%.
Then there’s star AI player Nvidia Corporation (NASDAQ: NVDA), whose share price tumbled by 5.6%.
And Elon Musk’s Tesla Inc (NASDAQ: TSLA) was among the worst performers, closing a hefty 8.4% lower overnight.
Now, here’s the interesting thing.
While the Nasdaq Index fell 2.0%, the small-cap Russell 2000 Index (RUSSELL: RUT) gained 3.6%. That’s the biggest lead the small-cap index has had on the Nasdaq since late 2020.
So, what’s going on?
Why didn’t the Nasdaq Index rally on subdued US inflation?
It appears that a sizeable and much-needed stock rotation is taking place. One that’s benefiting the horde of beaten down and recently neglected small-cap companies at the expense of the small cohort of mega-cap Nasdaq Index companies that everyone’s been buying.
“The big tech trade is turning on itself, yet the rest of the market is finally stepping in. The S&P 500 is down today, but this is the best kind of selloff you could hope for if you’re a long-term investor,” Ritholtz Wealth Management’s Callie Cox said (quoted by Bloomberg).
Janney Montgomery Scott’s Dan Wantrobski noted that the stock rotation that saw small-caps soar and the Nasdaq Index tank is an early sign of a healthy expansion in overall market breadth.
“This fanning out from the narrow leadership areas throughout much of this year is what we would like to see continue over the coming weeks and months in order to confirm a healthier expansion cycle on a longer-term basis,” Wantrobski said.
Charles Schwab’s Kevin Gordon added:
It’s a pretty swift reversal in the momentum trade, and that tends to benefit the laggards to a significant degree. No question it’s in response to the fact that the prospect of rate cuts helps companies that have been struggling in the ‘higher for longer environment’.
In the longer term, the Nasdaq Index remains up an impressive 33% over 12 months. That’s three times the 11% one-year gain posted by the Russell 2000 small-cap index.