Will large-cap tech stocks continue to outperform? Bank of America strategists look at these indicators
1min read Over the past week, the frenzied rotation in the US small-cap market has left investors wondering whether this year’s mega-cap tech winners will continue to dominate.
Bank of America Global Research strategists said the rotation would continue if the 10-year US Treasury yield fell below 4% and the ISM manufacturing PMI index rose above 50%.
The bank’s international strategy team, led by equity and quantitative strategist Ohsung Kwon, said in a Monday note that historical data shows that when the 10-year US Treasury yield falls more than 1 percentage point from its 12-month high and the ISM manufacturing PMI rises more than 4 percentage points from its 12-month low, the S&P 500 equal-weight index has outperformed the S&P 500 price-weight index in 90% of cases.
This suggests investors will need to see the 10-year yield around 3.99%, below its 52-week closing high of 4.99% on October 19, and the ISM manufacturing PMI above 50%, indicating an expansion in the manufacturing sector of the economy.
Kwon and his team wrote: “The manufacturing economy is in the second longest period of contraction in history, having not seen two consecutive months above 50% for 21 months. We believe this is largely due to the inventory cycle, and expect this to ease in the second half of 2024.”
The Institute for Supply Management’s manufacturing index fell to 48.5% in June from 48.7% in May. The key US factory gauge was at 46.5% in July, the lowest in 12 months. A reading below 50% indicates contraction.
The 10-year US Treasury yield rose three basis points to 4.268% on Monday as traders focused on the possibility that Vice President Kamala Harris might be chosen as the Democratic Party’s presidential nominee. The yield has risen 37.8 basis points this year as the Federal Reserve has maintained a dovish stance on interest-rate cuts amid persistent inflation concerns, according to FactSet.
Despite this, according to the CME FedWatch tool, traders in the federal fund futures market on Monday saw a 93.6% probability that the Fed would begin cutting its benchmark interest rate in September, but policymakers will face another inflation report before deciding on a summer cut.
The US stock market rose on Monday, with the “Big Seven” and tech stocks leading the rebound after suffering heavy losses last week.