Why has there been a rotation and can it continue?

The recent rotation out of tech stocks isn’t due to a fundamental darkening of the industry’s prospects, according to Vital Knowledge analysts.

Instead, a combination of “extremely stretched technical conditions” and a modest shift in the fundamental narrative spurred this aggressive positioning pivot.

June data has been quite “goldilocks,” signaling a cooling in inflation and employment but maintaining a decent growth trajectory, said the investment research firm.

Analysts explain that this shift led to a notable change in tone among Fed speakers, with officials nearing enough confidence to commence rate cuts, likely starting in September.

Additionally, Vital Knowledge says the odds of a Trump victory and a full GOP sweep have spiked, adding fiscal and regulatory drivers to the existing monetary and growth tailwinds. Investors reacted by rushing to buy cyclical and value stocks, funding these purchases by selling tech and momentum stocks, which had been the dominant holdings.

Analysts believe the rotation trade has near-term legs due to technical tailwinds, continued favorable macro news flow, and an underwhelming tech earnings season.

However, they caution that this is more of a relative trade than an absolute one.

They note that tech fundamentals remain strong on an absolute basis but may face a rocky earnings season due to elevated expectations and crowded positions.

Analysts cite ASML (AS:) as an example, noting that even a “beat-and-reiterate” report failed to excite investors. They also mention a small deterioration in enterprise tech purchasing trends, which could impact companies like CRM, WDAY, and VEEV.

In conclusion, while the rotation trade may continue in the near term, Vital Knowledge feels the broader macro narrative leaves room for disappointment, particularly regarding growth strength, the potential impact of a second Trump term, and the pace of policy easing.