Bull Market Rotation Has Begun. Is It Built To Last?

The market took a step back from its technology-driven sprint last week, delivering a much-needed reminder that bull markets do not move in a straight line.

Despite volatility tied to inflation data, Middle East developments, and the historic SpaceX IPO, major U.S. indexes finished the week higher. Small caps led the way, with the Russell 2000 gaining 3.9%, and the Dow, S&P 500, and Nasdaq also advancing, but to a lesser degree. Once-hot alternative assets like gold and Bitcoin continue to suffer.

Value stocks outperformed growth stocks for a second consecutive week. Evidence is building that market leadership is beginning to broaden beyond a narrow group of AI-related winners. Whether this will turn into a more sustained rotation is hard to know. It would be unwise to overstate any perceived advantages of value stocks after only minor wobbles in the leading growth names.

Investor sentiment improved late in the week as reports suggested progress toward another potential U.S.-Iran agreement. Falling oil prices helped ease inflation concerns and supported both stocks and bonds. While geopolitical uncertainty remains a critical risk, investors are primarily focused on the improving market breadth beneath the surface of this week’s rally.

Tech Cools While the Market Broadens

 

After nearly doubling this year, semiconductor stocks finally hit a speed bump. The pullback appears to be driven by profit-taking rather than any meaningful deterioration in AI fundamentals. If it is just profit-taking, then investors are on the same page with Bank of America, which published an analyst report early in the week calling for exactly that, given rising bearish conditions.

Bank of America holds a year-end S&P 500 target of 7,100 vs Friday’s S&P 500 closing price of 7,431.

Despite some shakiness appearing, the longer-term AI story remains largely intact. Major technology companies continue ramping up spending on infrastructure, with expectations of nearly $1 trillion in AI-related investment over the next year. That level of spending continues to provide a powerful tailwind for the sector.

What changed last week was leadership. Financials, healthcare, consumer staples, and small-cap stocks attracted greater investor interest while technology paused. The equal-weight S&P 500 is now outperforming its market-cap-weighted counterpart this year, a sign that gains are becoming more broadly distributed.

Healthy bull markets typically broaden over time, and a rotation like this could continue through the summer. It is neither surprising nor concerning that some investors are taking some off the top and reallocating to other sectors. The market has been on a tear, and a brief (or lengthy) consolidation in tech would offer a fresh springboard to new highs.

SpaceX

 

The largest IPO in history also grabbed investors’ attention. SpaceX raised approximately $75 billion and debuted with a valuation of nearly $1.8 trillion. The bears wishing for a WeWork-like IPO disaster ended the week disappointed, but it doesn’t rule out a large future drawdown as freshly unlocked shares get dumped on the market for the next 12 months.

Beyond the headlines, the offering serves as a test of investor appetite for high-growth companies with ambitious spending plans and stretched valuations. The demand suggests investors remain comfortable funding future growth opportunities, but it could wane as Anthropic and OpenAI vie for more investor money later this year.

The Fed Takes Center Stage

 

Inflation remained a key focus with CPI and PPI out this past week. Headline CPI rose 4.2% year over year, driven largely by energy prices. Core inflation came in softer than expected on a month-over-month basis but still rose to the highest annual rate since September (2.9%). Goods prices declined on a monthly basis for the first time in a year, but core services remain a trouble spot.

Inflation expectations on a 1-year and 5-year basis appear to be rolling over, although they are still alarmingly high. Those details matter. The Federal Reserve appears positioned to remain patient rather than respond aggressively to what is still an energy-driven inflation spike. If inflation levels off and expectations continue to fall, it will give the Fed more confidence to just hold indefinitely.

Warsh has made it clear that he wants to limit Fed communication and reduce forward guidance. While the Fed is expected to remove its easing bias at the upcoming meeting, don’t expect the statement or press conference to telegraph anything beyond that.

What this means for investors and what’s next

 

Markets appear to be entering a new phase. Leadership is broadening, volatility is returning, and investors are becoming more selective after an exceptionally strong rally.

The key questions are:

1. Will progress continue toward a U.S.-Iran agreement?

2. How will investors respond to the growing IPO pipeline?

3. When will inflation level off and at what level?

These factors will heavily influence expectations for interest rates and market leadership in the months ahead.

For investors, the overall picture remains constructive. Economic growth is holding up, earnings expectations remain strong, and participation across the market is improving. Pullbacks may become more common, but these should be embraced. What we’re seeing currently looks like healthy corrections, not signs of a major change in trend.

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Related: America Is Starting To Expect Higher Inflation Forever