US stocks rotate sharply as banks jump 3%, tech slides

Money rotated out of technology stocks and into financials and healthcare on June 4, delivering the sharpest sector divergence in months.

Money rotated out of technology into financials and healthcare on June 4, with healthcare surging 3.16% and financials gaining 2.68% while tech fell 1.43%.

"The market is finally acknowledging that tech cannot lead forever, especially after a 47% surge from the March low," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research.

Regional bank ETFs led all groups with a 3.09% gain, followed by medical industry ETFs at 3.07% and banking ETFs at 3.01%. Semiconductor ETFs dropped 1.63%, global tech index ETFs fell 1.53%, and tech sector ETFs declined 1.56%. Telecom added 2.12% and real estate rose 2.07%, while energy was flat.

The rotation comes as technology's share of S&P 500 market capitalization reached 39.4% on June 3, above the 35% peak of the 2000 Internet bubble, according to LSEG Datastream. With AI-investing megacaps like Alphabet, Amazon and Meta swelling the tech-adjacent share to more than half of index value, any sustained rotation away from the sector could trigger broader index declines.

The selloff in technology coincided with three catalysts: a 47% rally in the tech sector from its March low that left valuations extended, rising oil prices after Iran signaled it would block the Strait of Hormuz, and expectations that the Federal Reserve will remain hawkish as energy costs feed into inflation. West Texas Intermediate crude traded above $85 a barrel, adding to cost pressures for companies and consumers.

The rotation marks a sharp reversal from the previous nine weeks, during which the S&P 500 posted consecutive weekly gains and all three major indexes closed at record highs as recently as June 1. The S&P 500 equal-weight index had underperformed its market-cap-weighted counterpart by the widest margin in a nine-week period in data going back to 1990, according to LSEG Datastream — a sign that the rally was dangerously narrow.

Thursday's action improved market breadth. About 60% of S&P 500 constituents were trading above their 200-day moving averages as of last week, below the historical average of roughly 73% typically seen when the index is making new highs, according to LPL Financial. A broadening of participation into financials and healthcare could make the rally more sustainable.

The 10-year Treasury yield fell four basis points to 4.32% as money rotated out of growth stocks, while the U.S. Dollar Index held near 104.5. Gold rose 0.6% to $2,365 an ounce as Middle East tensions supported haven demand. The VIX edged up to 16.2, still below its long-term average of about 20, suggesting the rotation has not triggered panic selling.

For investors, the question is whether Thursday marks the start of a genuine regime change or merely a pause in the AI trade. The answer may come on June 12, when the May consumer price index release will test whether inflation is cooling enough for the Fed to consider rate cuts — a development that would favor the rate-sensitive financial and healthcare sectors that led Thursday's rally.

This article is for informational purposes only and does not constitute investment advice.