Last week, both the S&P and the Nasdaq experienced their largest weekly declines since April of this year, with the technology sector of the S&P 500 index losing over $900 billion in market value.

Taking into account valuations and geopolitical factors, the expectation of interest rate cuts and the rise of the "Trump trade," investors have been shifting funds towards cyclical stocks and small-cap stocks that lagged in the first half of the year. As the earnings season unfolds in full, the tech stocks' rebound on Monday (July 22) still needs to withstand the test of performance.

Sector rotation continues to unfold.

Since the second half of the year, the rise in cyclical sectors such as financial and industrial stocks in the US, as well as small-cap stocks, has partially offset the downturn in the two major weighted sectors of information technology and communication services.

Anthony Saglimbene, Chief Market Strategist at financial institution Ameriprise Financial, believes that the June Consumer Price Index (CPI) inflation report almost solidified the expectation of a Federal Reserve rate cut in September, triggering a market shift towards areas that have been struggling under tight monetary policy.

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Small-cap stocks are typically more sensitive to economic fluctuations and market sentiment and may benefit from interest rate cuts. In addition, as part of the "Trump trade," small-cap stocks are seen as potential beneficiaries of a Republican victory in November. David Kostin, Chief U.S. Equity Strategist at Goldman Sachs, stated that although Trump has not put forward detailed policy proposals for a second term, lowering taxes and regulations while increasing tariffs could boost the domestic market, including small-cap stocks.

The increase in market breadth also strengthens the prospects for the sustainability of future stock market rebounds. Stephen Suttmeier, a Technical Research Strategist at Bank of America, said in a report published last week that the current trend is clearly healthier than in the first half of the year.

Data from research institution Ned Davis Research shows that in the recent sector rotation, the number of rising stocks in the US stock market has reached its highest level since November last year. Historically, when the number of rising stocks is at least 2.5 times the number of falling stocks, as was the case last week, the S&P 500 index has an average increase of 4.5% in the next three months. "The risk lies in the weighted influence of large-cap stocks on future returns, but history indicates that strong breadth improvement is a more important positive factor."

Wells Fargo Research previously upgraded the S&P financial sector to a buy rating and predicted it would outperform the broader market. The institution forecasts that Federal Reserve decisions are leading to changes in net interest income for the second quarter and beyond, on the one hand, while the capital markets are showing the best improvement in three years. Financial institutions are controlling costs, credit loss growth is better than expected, and increased dividends and buybacks will all benefit the sector.

Can tech stocks withstand the test of performance?After a series of adjustments last week, tech stocks are set to face the test of the earnings season. Among the big seven, Tesla and Google's parent company Alphabet will take the lead in releasing their results on Tuesday (July 23), with Microsoft and Apple following suit next week.

A Bank of America survey of fund managers in July revealed that despite some recent portfolio adjustments and sector rotation by institutions, being long on tech stocks, including the big seven, has been the most crowded trade for 16 consecutive months.

Hit by geopolitical factors, the Philadelphia Semiconductor Index fell nearly 8% from its historical high, with Nvidia and AMD entering a correction phase. Institutional statistics found that the gains of the big seven this year have contributed 60% to the S&P 500 index. The fervor for artificial intelligence has also set high standards for earnings expectations. According to data provided by the London Stock Exchange Group (LSEG) to First Financial journalists, the information technology industry's earnings are expected to grow by 17% year-on-year, and the communication services industry by about 22%, both significantly exceeding the overall 11% expected increase in the S&P 500 index.

Charles Schwab has warned in its market outlook about the widening impact of earnings on stock price volatility. Last quarter, the earnings guidance from companies such as human resources service provider Workday, online payroll software supplier Paycom, and Palo Alto Networks caused panic. Recently, some brokerages have begun to downgrade the ratings of some software companies. Therefore, the earnings of the tech giants this week will be a test for the outside world to assess the health of corporate capital expenditures.

Citi wrote in a recent report that many leading large artificial intelligence company stocks are overpriced, even according to Wall Street's optimistic outlook for free cash flow growth over the next five years. However, Citi also said that completely exiting artificial intelligence is not realistic, "In fact, for many buyers, not owning or directly selling artificial intelligence is difficult."

It should be noted that the profit growth rate of the technology sector will continue to slow down in the second half of this year, with the big seven possibly falling to around 15%. In contrast, the average earnings of the rest of the sectors in the third and fourth quarters will reach 6.8% and 13.9%, respectively. Katie Nixon, Chief Investment Officer of Northern Trust Wealth Management, said: "We expect that in the second half of 2024, almost all sectors of the S&P will participate in profit growth."

Albert Edwards, Chief Global Strategist at Societe Generale, warned in a report that the boom in U.S. tech stocks may be about to end. The weight of U.S. tech stocks in the S&P 500 index has swelled to 35% of the total market value, a new high since the burst of the tech stock bubble in the early 21st century. In Edwards' view, the overall earnings growth may disappoint the market.