While tech stocks are stumbling, the good old Dow Jones is holding the fortress. That pretty much sums up the dynamics of the US markets in recent weeks.
Last week illustrated this again. Alphabet's results were met cautiously by the market, while Amazon shares fell over 5% after their results. In contrast, the Dow Jones crossed the symbolic 50,000-point threshold for the first time.
The run of corporate earnings has only reinforced doubts about the ability to make the massive investments in AI pay off. Capex by the four hyperscalers - Amazon, Alphabet, Meta, Microsoft - will reach $660bn in 2026.
Doubts about AI have now been surfacing for several months and are showing up in a shift in leadership within the US market. The Nasdaq 100 set its most recent high on October 29 - during the previous earnings season.
Since then, tech has underperformed, and sectors such as energy and consumer staples have been leading the way. "Rotation is the new momentum trade,” sums up Liz Ann Sonders, chief investment strategist at Charles Schwab.
Performance of the different sectors that make up the S&P 500 since January 1 Source: MarketScreener heatmap
Over the past ten years, the Dow Jones has outperformed the Nasdaq only twice : in 2016 and in 2022. Given that 2022 was a negative year for markets across the board, in a context of Federal Reserve rate hikes that triggered a "derating” (a decline in valuation multiples). Tech, a richly valued sector, was therefore the first casualty of that environment.
Outperformance by the Dow Jones is therefore fairly rare. However, over the past three years, investors have piled into tech (to play AI) and neglected other parts of the market. That enthusiasm has created significant valuation gaps, which can now justify a form of rotation.
The Dow Jones could wrap up a tenth straight month of gains this month. Such a streak has been seen only once in the past ten years, between April 2017 and January 2018.
