The stock market has been quite volatile recently, marked by significant shifts. The major index has slipped into the red this year, falling 0.25% since January.
Stocks To Watch | ?Ready, set, trade! Keep an eye on these stocks as they set the market abuzz
#StockMarket pic.twitter.com/K7wW7g2j41
— ET NOW (@ETNOWlive) March 4, 2025
Technology stocks, which were the biggest contributors to the bull market in 2023 and 2024, have been the main drag on stock returns in 2025.
Meanwhile, sectors like financial services, basic materials, and healthcare are attracting new investor interest. International markets, including China, the United Kingdom, and Germany, have also staged significant rallies. “Overall, there’s this subtle transition in leadership,” says Michael Arone, chief investment strategist at State Street Global Advisors.
Stock market crash: Has Nifty formed bottom? As FII selling gets brutal, @nikunjdalmia decodes market set-up | Editor's Take https://t.co/h9JDC3CJpU
— ET NOW (@ETNOWlive) March 3, 2025
Nice collection of headlines we saw back in '22/'23.
All stocks have done is gain 70% since Oct '22.
Nice one from @awealthofcs. pic.twitter.com/zjVblDmVdU
— Ryan Detrick, CMT (@RyanDetrick) March 2, 2025
However, it remains uncertain whether these trends will persist amid uncertainties about future Federal Reserve interest-rate cuts, sticky inflation, and the impact of President Donald Trump’s economic policy proposals, such as tariffs. Moreover, Big Tech has stumbled more than once, only to rebound strongly a few months later. During a rotation, investors shift from stocks that have been key to a dominant trend into other parts of the market that have lagged behind.
This often involves moving out of high-valuation stocks and into cheaper ones. Rotations can occur among various stock sectors, market capitalizations, or investment styles (e.g., growth versus value). Technology stocks returned more than 36% in 2024 but are down almost 5% so far in 2025.
Industry giants like Microsoft and Nvidia are all in the red for the year, with Nvidia down more than 10%. Conversely, basic materials were the worst-performing sector in 2024, yet these stocks have returned 4.55% so far in 2025. Healthcare stocks are also soaring after a modest 2.7% return in 2024.
Investors appear to be shifting towards value stocks. The value segment lagged behind the growth segment significantly in 2024, but this year, value stocks are climbing while growth stocks, dragged down by Big Tech losses, are floundering.
Value stocks gain investor attention
Some cyclical sectors, like financials, are outperforming, while others, like consumer cyclicals, are struggling. There is a view of the rotation in terms of valuations. The key metric is the price/fair value ratio, which compares a stock’s market price to its assessed true value.
A ratio above 1 indicates overvaluation, while a ratio below 1 suggests undervaluation. As the mega-cap tech sector has become increasingly overvalued, there are early signs that investors are turning toward areas of global markets trading at more attractive prices. Non-US markets like the UK have also performed well.
In light of recent struggles for Big Tech, some strategists advise investors to look at cyclical areas of the market due to solid economic growth, a steady job market, and mild inflation. Lisa Shalett, CIO of Morgan Stanley Wealth Management, suggests adding cyclicals like financials, energy, and consumer services to US stock portfolios. However, recent weak consumer sentiment data has temporarily boosted defensive sectors like healthcare and consumer defensive stocks.
Scott Wren, senior global market strategist at Wells Fargo Investment Institute, expects this boost to be short-lived, anticipating the US economy to improve in the year’s second half, benefiting cyclical sectors. Late last summer, mega-cap technology stocks stumbled, with value stocks and small caps leading temporarily. However, it wasn’t long before tech stocks resumed leadership due to AI enthusiasm, a resilient economy, and investor hopes for interest-rate cuts.
“We have these relief rallies, but they only last a month, maybe six weeks,” says Adam Turnquist, chief technical strategist at LPL Financial. Turnquist remains skeptical of a durable shift away from growth stocks. Other strategists, like Michael Arone, see more evidence of a lasting rotation due to the narrowing earnings gap between the “Magnificent Seven” and the rest of the market.
The emphasis should be on focusing on quality stocks at attractive prices rather than trying to time the market. Buying good quality undervalued stocks can yield higher expected returns. “Whether that turn has happened now, or whether it happens at some point in the future … if you’re buying good quality undervalued stocks … then you’ve got a higher expected return,” Kemp says.
Photo by; Anna Tarazevich on Pexels
