Market snapshot: rotation notches up a gear

The rotation trade notched up a gear, sending the benchmark S&P500 and the Dow Jones to new record closing highs, while the Nasdaq index failed to keep pace.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Concerns around overinvestment and the likely returns in AI have been on the table for some time, and Oracle Corp (NYSE:ORCL) continues to be the canary in the coal mine as its shares fell by around 11%. A disappointing quarterly revenue return and higher spending estimates raised fears over its debt position, with an inevitable read across to the bellwethers in the space such as NVIDIA Corp (NASDAQ:NVDA).

Investors are therefore searching for alternative real assets, especially given the Federal Reserve rate cut and the possibility of more to come, with any rate rises having now been ruled out. This has lifted some cyclical stocks and household names such as The Home Depot Inc (NYSE:HD), while smaller companies have been boosted by the easing monetary policy environment.

Indeed, the Russell 2000 index reached another record closing high as smaller companies came into focus. Quite apart from the potential valuation opportunities, such stocks are also likely to reap the benefit of lower rates as they often borrow to grow their business. The rotation also provides something of a hedge for investors, where concentration risk among the “Magnificent Seven” in particular was becoming more of an issue.

• Watch our video: ARK Invest’s Cathie Wood: why we’re betting big on Tesla
• The cheapest Mag7 stock is now a buy
• We still like gold, but here’s why we’ve halved exposure

Despite its dip, the Nasdaq remains ahead by 22.2% so far this year and around 1.5% away from its own record high which was set at the end of October. Meanwhile, the fresh buying impetus has lifted the Dow and S&P500 to stand up by 14.5% and 17.3% respectively in the year to date.

Asian markets were cautiously positive, choosing to brush off not only any technology jitters from Wall Street but also the upcoming Bank of Japan policy meeting, where it is expected that the central bank will hike interest rates.

Next week will also herald an economic work conference in China, where the early indications are that the authorities will prioritise boosting consumer spending and reversing the decline in investment as the economy grapples with a beleaguered property sector, high youth unemployment and tepid consumer sentiment. The possibility of more stimulus and therefore demand from China lifted precious metal stocks, such as copper which also reached a record high on the futures market.

As if proof were needed, the UK has its own issues to deal with as its moribund economy showed further signs of weakness. GDP fell by 0.1% in October and failed to recover from the same result in September, where car production had been a drag following the Jaguar Land Rover cyber attack. The 0.1% increase which had been expected simply did not materialise and was not helped by a high level of uncertainty around the Budget and its stultifying actions.

With the economy heading closer to a technical recession, the Bank of England may be forced to take action and ease interest rates more aggressively in an effort to inject some enthusiasm into the ailing economy at its meeting next week.

• Sector Screener: time to grab Tesco and Sainsbury’s shares?
• Bank of England ‘behind the curve’ even after likely rate cut
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

The FTSE100 posted some resilient gains at the open, although lower than the futures market had suggested given the dampening effect on sentiment of the GDP update. Notable early risers were the likes of InterContinental Hotels Group (LSE:IHG) and Ashtead Group (LSE:AHT), both seen as beneficiaries of a stronger than expected US economy and indeed the rotation trade.

Further gold price gains also saw Fresnillo (LSE:FRES) and Endeavour Mining (LSE:EDV) among the leaders, while the potential for Chinese stimulus lifted HSBC Holdings (LSE:HSBA) and Standard Chartered (LSE:STAN). These gains underpinned a defiant open for the premier index, which has now seen a notable gain of 19.1% in the year to date.