It’s a tale of two markets. 

On one hand, growth stocks are getting slammed. 

Look no further than semiconductors. The VanEck Semiconductor ETF (SMH) has plummeted 23% since late June. 

But it’s not just semis. Basically anything related to the artificial intelligence (AI) CapEx trade has gotten hit hard. 

Nebius Group NV (NBIS), a leading neocloud name, has plunged 46% since last June. 

SanDisk Corp. (SNDK), one of the memory leaders, has fallen 55% over the same period. It went from being one of the strongest stocks in the entire market to one of the worst. 

Even industrials with exposure to the AI trade have gotten clipped. Forgent Power Solutions (FPS), for example, has dropped 52% from its recent highs. 

It’s truly been a historic unwind. By some measures, the current growth stock selloff rivals what occurred during the COVID crash. 

That’s almost hard to imagine. After all, it’s not like there’s been a major event or bearish catalyst. Instead, it’s been a systematic unwind. 

And yet, many investors have yet to feel the sting. 

Take a look at this chart. It shows the performance of the S&P 500 ETF (SPY). We can see that SPY is holding up pretty well. It’s basically rangebound.

The Invesco S&P 500 Equal Weight ETF (RSP) is even stronger. Yesterday, RSP broke out to new all-time highs. 

There’s a simple explanation for this. Many groups outside of tech are performing quite well. 

Take financials. Like RSP, the Financial Select Sector SPDR ETF (XLF) has been rallying strongly lately. Yesterday, it finished 1.3% higher and recorded yet another all-time high. 

Healthcare stocks are on fire as well. Yesterday, the Health Care Select Sector SPDR ETF (XLV) also broke out to fresh record highs. 

The Industrial Select Sector SPDR ETF (XLI) also remains in a strong uptrend. 

In other words, there are plenty of other areas outside of tech that are working great.

The question is: How much longer can this continue? You see, the ongoing rotation is objectively “risk off.” Money has gone from high-flying growth stories to lower-beta stocks.

There’s nothing wrong with that… as long as growth stocks eventually play catch up. 

You see, riskier areas of the market will top before more defensive stocks. We saw this play out back in late 2021. The Invesco QQQ Trust (QQQ) topped in November 2021. 

SPY, which has less tech exposure than the QQQs, didn’t top out until early January 2022. 

In other words, it’s fine that other areas of the market are working right now. But for this bull market to keep marching higher, it’s important that tech stocks stop falling soon.

This is the #1 thing I’m watching at the moment.

Justin Spittler

Director of Trading, RiskHedge