Market Update: Small Caps Shine as Large-Cap Tech Faces Profit-Taking Amid Mixed Economic Signals

Midday trading has revealed a divergence in market performance, with small-cap stocks in the Russell 2000 index outperforming their larger peers, while major indices like the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average post losses. This split reflects ongoing sector rotation, mixed reactions to earnings, and a slew of economic data shaping investor sentiment.

Small-Cap Resurgence Amid Rotational Activity

The Russell 2000 has risen 0.2% today, extending its impressive performance in November, with a 10.7% gain since the start of the month. This outperformance stems from rotational activity as investors shift away from mega-cap stocks that have led the market’s gains this year. While small caps have thrived, the S&P 500, Dow Jones, and Nasdaq Composite are down 0.5%, 0.2%, and 0.9%, respectively.

Tech Sector Weakness Weighs on Major Indices

Technology stocks are experiencing notable declines, driven by disappointing earnings from companies like Dell, Autodesk, CrowdStrike, and Workday. These results have contributed to a 1.8% drop in the S&P 500 information technology sector. Chipmakers such as NVIDIA and Broadcom are also under pressure, down 3.1% and 3.6%, respectively. Profit-taking activity following significant year-to-date gains in the tech sector has added to the downward momentum.

Real estate is a rare bright spot, with the sector up 0.9% in response to falling Treasury yields. The 10-year yield has dropped six basis points to 4.24%, while the 2-year yield is down five basis points to 4.20%. Lower market rates are providing a tailwind for rate-sensitive sectors.

Mixed Economic Data Shapes Market Sentiment

Today’s economic releases have painted a complex picture of the U.S. economy:

- Income and Spending: Personal income rose 0.6% in October, outpacing expectations of 0.3%, while personal spending increased 0.4%, also exceeding the consensus of 0.2%. Despite these gains, the PCE price indexes indicated no disinflationary trends, with the core PCE rising 2.8% year-over-year, slightly above September’s 2.7%. This leaves the Federal Reserve likely to maintain a gradual approach to rate adjustments.

- Labor Market: Initial jobless claims remained low at 213,000, signaling continued reluctance by employers to reduce staff. However, continuing claims rose to 1.907 million, reflecting challenges for those seeking reemployment.

- Durable Goods Orders: October durable goods orders grew by 0.2%, below expectations of 0.4%. The report showed softness in business spending, as evidenced by a 0.2% decline in new orders for nondefense capital goods excluding aircraft.

- Pending Home Sales: A standout metric, pending home sales surged 2.0% in October, defying expectations of a 1.5% decline. This suggests resilience in the housing market despite broader economic uncertainties.

- Chicago PMI: The manufacturing index fell to 40.2 in November, below the consensus of 45.0, highlighting ongoing contraction in the sector.

Outlook for Markets

The market's mixed performance reflects an interplay of profit-taking in high-growth sectors, sector rotation, and a generally supportive but nuanced economic backdrop. The strength in small caps suggests investors are seeking opportunities outside of the dominant large-cap technology space, which has faced headwinds from earnings disappointments and valuation concerns.

Economic resilience, as evidenced by strong personal income and spending, supports the broader market, though persistent inflationary pressures and weakening business investment temper the outlook. Lower Treasury yields have provided relief to rate-sensitive sectors, but questions remain about the sustainability of these trends.

Conclusion

The midday snapshot of the markets highlights the complexities investors are navigating. While small-cap stocks continue to gain traction, large-cap technology struggles with profit-taking and mixed earnings results. Economic data underscores a resilient consumer base but also points to challenges in manufacturing and business investment. As the market digests these developments, the balance of optimism and caution will likely determine the direction heading into the final trading sessions of November.