Investors rethink recession plays, boosting US stock market laggards

A US stocks rally is showing signs of expanding beyond the cluster of giant growth and tech names that have led gains this year, as investors reposition portfolios primed for a widely expected recession.

For months, investors piled into a handful of megacap companies seen as safe bets in uncertain times, spurring a rally that has lifted the S&P 500 nearly 12% year-to-date, concentrated in a small group of stocks.

As the US economy holds up despite higher interest rates, fears of an imminent downturn are fading. Some investors have started dipping their toes into economically sensitive market areas that have been out of favor this year including small caps, energy shares and industrial stocks - all of which have seen hefty rallies in June, reported Reuters.

"We're seeing indications that the economy is going to be more resilient to headwinds," said Tim Murray, a capital market strategist in T Rowe Price's multi-asset division. "There's reason to believe that the pessimism we saw at the start of the year is giving way to a stronger-than-expected market."

Murray has increased his allocation to small-cap stocks, which tend to be among the most direct beneficiaries of economic growth. The Russell 2000 small cap index of small cap companies (.RUT) has surged 6.6% this month. The index is up 5.9% year-to-date.

Other rebounding segments in June include the S&P 500 energy sector, which has gained 6% this month and S&P 500 industrials, up 5.7%. Energy is down 7.6% year-to-date, while industrials have risen nearly 4%.

By contrast, the tech-heavy Nasdaq 100 has gained about 2% this month - though the recent underperformance follows a nearly 33% year-to-date surge on excitement over developments in artificial intelligence.

A broadening equity rally would be a welcome development for many investors, who have worried about the market's narrow leadership. Just seven stocks - Apple Inc (AAPL.O), Microsoft Corp (MSFT.O), Alphabet Inc (GOOGL.O), Amazon.com Inc (AMZN.O), Nvidia Corp (NVDA.O), Meta Platforms Inc (META.O), and Tesla Inc (TSLA.O) - have been responsible for almost all of the S&P 500's gains this year, data from S&P Dow Jones Indices showed.

"This kind of dominance is unusual but you're starting to see it turn around," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.