“Ripeness is all.”

By uttering those words, Shakespeare’s King Lear highlights the importance of seizing the right moment, a principle that resonates in life and financial markets.

In recent weeks, a significant theme has emerged in the markets: leadership rotation. The time is ripe to embrace the trend.

The technology sector’s decline has been juxtaposed with gains in cyclical sectors, which had been underperforming earlier in the year. This trend is particularly evident in the sharp rally of small-cap stocks.

In the initial months of 2024, both stock prices and interest rates climbed together. However, this relationship has recently evolved. As interest rates have declined significantly, driven by moderating inflation and anticipated Federal Reserve rate cuts, equities have continued their upward trajectory, buoyed by rising corporate earnings. But market leaderships is changing.

This shift in performance underscores the importance of disciplined diversification and maintaining balance within portfolios. I believe market leadership will continue to broaden, supported by extended economic expansion, favorable Fed policies, and rising corporate profits.

Last week, stock markets experienced significant fluctuations. An early-week surge propelled U.S. markets to new highs, but this momentum waned towards the end of the week, primarily due to weakness in the technology sector.

Consequently, the major indices ended last week mixed: the S&P 500 and NASDAQ recorded losses, while the Dow Jones Industrial Average posted a solid gain (see chart).

At the beginning of the year, I accurately predicted that while equity markets would perform well, leadership would broaden beyond the tech sector’s “Magnificent Seven” that performed so well in 2023.

Though it may be premature to declare complete victory for this broader market leadership, last week’s developments provided a compelling glimpse into this accelerating shift.

The primary driver of market activity lately has been the tech sector’s weakness, resulting in divergent performances among major indices.

The interplay between stocks and interest rates has been a dominant theme in 2024. Initially, both moved higher together as the economy showed resilience despite hotter-than-expected inflation. This changed in April, when concerns about further Fed tightening led to a surge in rates and a pullback in equities.

However, stocks recently have rallied amid a significant drop in interest rates, driven by prospects of cooling inflation, an impending Fed rate cut, and continued economic growth.

The narrative of an economic “soft landing” has gained traction and appears to be largely priced into the markets. I believe the Fed can manage this delicate balance. While market consensus heavily anticipates a September rate cut, any deviation from expected inflation data could introduce volatility.

Last week marked a noticeable shift, with the S&P 500 equal-weight index outperforming due to the underperformance of the largest tech and communication services names. In contrast, cyclical sectors such as financials, industrials, and energy saw gains. This pattern is poised to continue.

Don’t get me wrong: I don’t believe this trend signals a prolonged slump for mega-cap tech names. The combination of robust earnings streams and the long-term growth of artificial intelligence (AI) should continue to benefit these companies throughout the second half of 2024 and into next year.

The most notable change has been the resurgence of small-cap stocks. After largely stagnating for much of 2024, small caps have been on a tear lately, driven by growing confidence in a forthcoming Fed rate cut and signs of a slowing yet resilient economy.

This outperformance of the small fry reflects the potential for leadership to shift toward more cyclical, economically sensitive investments, as easier Fed policy bolsters these market segments.

The week ahead…

The following economic reports, scheduled for release in the coming days, have the power to move markets:

Existing home sales, S&P flash U.S. services purchasing managers’ index (PMI), S&P flash U.S. manufacturing PMI (Tuesday); new home sales (Wednesday); U.S. gross domestic product (GDP), initial jobless claims, durable goods orders, advanced retail and wholesale inventories (Thursday); personal income and spending, personal consumption expenditures index (PCE), and consumer sentiment (Friday).

The recent shifts described above suggest a durable trend whereby lagging sectors among U.S. large caps play catch-up. The growth rate of S&P 500 profits, excluding the Magnificent Seven, is expected to accelerate. What’s more, given the elevated valuations of high-flying tech stocks, I foresee a continued broadening of market leadership.

On Monday, the main U.S. stock market indices responded positively to President Biden’s exit from the 2024 race and closed higher as follows:

• DJIA: +0.32%
• S&P 500: +1.08%
• NASDAQ: +1.58%
• Russell 2000: +1.66%

The CBOE Volatility Index (VIX), aka “fear gauge,” plunged by about 10% to close at 14.87, signaling less stress and anxiety in the markets.

Read This Story: Artificial Intelligence: Resistance Is Futile

Editor’s Note: As I explained above, AI remains a huge investment opportunity. However, you need to be wary of high valuations and media hype.

Perhaps you’re eyeing the Big Tech stalwarts that are making massive investments in AI. Well, they’re obvious plays on the trend and they’ve been trading at lofty heights.

How can you safely invest in AI? Consider the advice of my colleague Robert Rapier.

Robert Rapier is an income investing legend. He’s the chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert has found a better way to make money from the AI super-boom, thanks to a group of under-the-radar tech plays. Robert is locked in on AI right now because of the incredible income opportunities it has created. To learn more, click here.

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John Persinos is the editorial director of Investing Daily.

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