Will The S&P 500 Rhyme In September?
S&P 500 Rotation
Back in September 2024 we made the following observations with regard to the S&P 500:
Over the last three weeks, stock performance in the S&P 500 has noticeably shifted.
Magnificent 7 stocks have stalled and the other 493 stocks in the S&P 500 have have driven the S&P 500 higher. This shift is a key development in the current market dynamics.
Evidence shows that investors are rotating out of growth stocks and into the broader market, particularly small caps.
We are now at the beginning of September 2025 and those same observations apply.
Tech stocks have led the post Liberation Day tariff rally in the S&P 500. Now, the broader market is picking up the baton.
Retail has led the rally in tech stocks, however, hedge funds are reducing exposure to mega caps. Hedge funds and mutual funds have added to positions in healthcare, materials and non-AI-exposed growth stocks.
That partially reflects our narrative and concern that mega-cap stocks are unlikely to realise returns on their capital investment in AI in the short term and valuations are stretched.
AI Weakness
Last weeks Nvidia earnings showed some weakness in AI data center growth. In addition, Alibaba announced on Friday that they had developed a new AI chip that could rival Nvidia’s.
The emergence of an Alibaba AI chip will shine a spotlight on mega-cap stocks and the return on AI capital expenditure.
Most mutual funds have their year end in October and will be using September to position for the remainder of the year and the 4th quarter.
The likely FED cut in interest rates will add to the mix.
Small caps, historically, gain the most (compared to mid and large caps) after the first rate cut by the FED. In the three months after the first rate cut small caps on average return +10.9%, mid caps +9.2% and large caps +5.6%.
The rhyme suggests that there’s a pivot coming in the market. Follow the flows and guard against blindly following your opinions.
S&P 500 Key Levels
The S&P 500 opens in positive gamma today.
The gamma flip zone sits at 6265; the call resistance level is 6500, and the put support level is 6100.
The index needs to break and confirm above the 6540 level to maintain the current trend.
Nonfarm Payroll this week will likely shape the direction of the market.
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The Business Cycle Explained Simply
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