The Big Picture

Briefing.com Summary:

*Sharp declines in tech stocks masked a healthy market rotation, with most sectors, small caps, and equal-weighted indexes posting solid gains.

*Despite volatility and AI disruption fears, rising earnings estimates and broader participation signaled a bull market rotation, not a market retreat.

*The week highlighted growing investor willingness to look beyond former leaders as earnings trends and rate expectations stayed supportive.

The information technology sector fell as much as 5.2% this week; the consumer discretionary sector declined as much as 7.2%, and the communication services sector dropped as much as 5.4%.

NVIDIA (NVDA), Microsoft (MSFT), Alphabet (GOOG/GOOGL), Meta Platforms (META), Tesla (TSLA), and Amazon.com (AMZN) all lost ground this week.

Corporate layoffs hit their highest January level since 2009, and job openings in December (6.542 million) were nearly a million less than the same period a year ago, hitting their lowest level since 2020.

Bitcoin prices plunged as much as 25%.

And you know what? It was a really good week for the stock market.

A Rotation, Not a Retreat

Things felt bad this week, and there is no denying that things were bad for a number of stocks, namely the software stocks that got pummeled by AI disruption fears and many of the over-owned mega-cap stocks. To be sure, there wasn't any unhedged owner of a passively managed S&P 500 Index fund that went unharmed.

Nevertheless, it was a good week, and here is why as of this writing:

• There were seven S&P 500 sectors that traded higher, and four—consumer staples, energy, industrials, and materials—gained at least 3.3%.

• The equal-weighted S&P 500 increased 1.8%.

• The S&P MidCap 400 Index surged 4.5%.

• The Russell 2000 advanced 1.9% (the S&P SmallCap 600 jumped 3.7%).

• The Russell 3000 Value Index gained 2.1%.

This week may have been accented by a retreat from many of the market's former leaders, but it wasn't a retreat from the stock market. It was a rotation within the stock market. That is bull market behavior, albeit with a keener eye for risk exposure.

Relatedly, there was some renewed appreciation for the idea that a weaker labor market is a risk to the U.S. growth outlook. That came to light with the Challenger layoff report, the JOLTS - Job Openings report, and a higher-than-expected increase in weekly initial jobless claims.

Those were nuggets of bad news, but where they became good news for the stock market is in the notion that they are data points that skew in favor of the Fed continuing to cut rates. Expectations for at least two more rate cuts before the end of the year firmed up in the fed funds futures market, and Treasury yields across the curve took a dip in response.

What didn't take a dip this week were earnings estimates.

Some of the reactions to good earnings results and guidance might have been off-putting, but the estimate trend remained the market's friend, as seen in the chart below. This is the stuff that buy-the-dip conviction is made of when interest rates remain well-behaved.

Sure enough, the load of a bad-feeling week was lightened on Friday with a robust rally that took shape without Amazon.com (AMZN), Alphabet (GOOG/GOOGL), and Meta Platforms (META) participating. And that was okay. It was a microcosm of a market that has learned in recent months to look beyond a handful of stocks to find good fortune elsewhere.

Briefing.com Analyst Insight

We don't typically use this column to provide a weekly perspective, but it was necessary and relevant to the big picture. What transpired this week was a wake-up call for concentration risk and a warning shot with respect to the opportunities and disruption AI can create for U.S. businesses.

At the same time, it was a good week for the broader market, which took the shots of a flailing tech sector and remained standing, finding balance in rising earnings estimates, trickle-down optimism from massive AI investment plans, the ISM reports of expansion in the manufacturing and services sectors, and the tantalizing prospect of additional rate cuts.

It wasn't all good, but in the big picture it was a good week for the broader market.

--Patrick J. O'Hare, Briefing.com