Tech Stocks Are Out. Small Stocks Are In. Can That Last?

Something appears to have shifted in the stock market. For the moment, at least.

For the first half of this year, technology stocks — especially those linked to the expected boom in artificial intelligence — propelled major indexes around the world higher.

The tech sector has risen faster than any other sector and twice as quickly as all of them this year, except for communications companies, which include the likes of Amazon. Just a handful of stocks accounted for nearly two-thirds of the gains in the S&P 500 this year. Given their influence over the broad market, it was a rally that led some worrying conclusions about what might happen if it lost steam.

That may be happening. Investors are growing confident that the Federal Reserve will start to lower interest rates soon, which could spur spending and give the economy a lift. Shares of businesses that could benefit from this growth — smaller companies, banks and real estate businesses — have all rallied in the past two weeks, while Big Tech has stumbled.

It’s still early, but some analysts and investors see it as a sign that the stock-market dominance of companies like Nvidia and Microsoft may be starting to wane. It might not be a smooth transition — as trading on Wednesday, when stocks had their worst day since late 2022, showed.

Big companies have a big impact on the stock market because even small changes in their share prices can create and destroy billions of dollars of value for investors. Replacing the tech stocks with a wider swath of smaller companies as leaders is not guaranteed to produce the same ferocious rally that occurred in the first half of the year.

“I think it’s a little putting the cart before the horse,” said George Goncalves, the head of U.S. macro strategy at MUFG Securities. “And it’s a small cart.”