Stocks kick off July with surprising twist

Stocks kick off July with surprising twist originally appeared on TheStreet.

It’s been all about technology lately. After stocks found their footing in early April when President Donald Trump paused most reciprocal tariffs, clearing the way for trade deals, technology stocks have surged.

The SPDR Technology ETF  (XLK)  gained 23% from April 9 through the end of the second quarter, handily out-pacing other sectors and the S&P 500, which returned 10.5% over the same period.

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The tech stock stars during the rally have been familiar names. For instance, AI darlings Nvidia and Palantir have skyrocketed a jaw-dropping 46% and 62%, respectively, after gaining 171% and 340% in 2024.

The move has been impressive, but stocks don’t rise or fall in a straight line forever. The third quarter has kicked off with a surprising list of stocks taking the baton from technology—at least for now.

The rise in these down-and-outers could be fleeting, but after lagging technology stocks for a while, the recent action may make them intriguing, especially given technology stock valuations are arguably stratospheric.

Stock market valuation surges back toward early 2025 highs

The stock market rally followed a massive sell-off that was fast and steep enough to cause most investor sentiment measures to flash deeply “oversold.”

Plenty of risks were behind the drop, including sticky inflation, growing joblessness, and uncertainty over how newly enacted tariffs may impact household and business spending.

Related: Veteran analyst sends blunt message on what's next for stocks

The combination of a weakening economy and cash-strapped consumers led many to think stagflation or recession is in the cards.

The risk of such an economic reckoning isn’t off the table. But the stock market is forward-looking, and investors appear to think most of the risk was priced into stocks at the early April lows.

The trade deals announced so far with the UK and China aren’t overly comprehensive, but they provide a blueprint that suggests tariffs might stay at current levels, providing much-needed clarity.

If so, inflation caused by tariffs may be – dare I say it… transitory.

A slight increase in inflation because of tariffs could prove manageable as long as it doesn’t derail the likelihood of a friendly Fed.

After cutting the Fed Funds Rate by 1% last year to stimulate the job market, the Fed has remained on the sidelines this year, awaiting clarity on how import taxes will impact inflation.

However, most, including the Fed itself, expect rate cuts at some point this year. The Fed’s dot-plot in June suggested its monetary policy will send interest rates a half-point lower by the end of 2025.

(Bank of America believes the Fed will ) reduce rates by 1% ( in 2026) , while Morgan Stanley projects seven rate cuts.

The prospect of lower rates driving economic growth, corporate revenue, and profit has reignited investors' animal spirits.

Investors have also begun to model in potentially higher forward earnings estimates in the wake of a significant drop in the US Dollar. This helps financial results for companies that get sizable revenue from overseas, such as technology stocks.

As a result, the S&P 500's forward price-to-earnings ratio has increased to nearly 22, an arguably rich valuation given historical returns tend to be middling once the stock market's P/E ratio exceeds 20.

A rolling rotation in the stock market?

A return of optimism has caused some signals to flash overbought, suggesting that the stock rally may pause. For example, the S&P 500's relative strength index eclipsed 70 last week, a level that can foretell weakness.

While concerning, not all stocks have to fall to work off that overbought condition.

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Many stocks have lagged technology stocks since April, and they may hold up or gain ground if high-flyers backfill some of their recent gains.

We may already be seeing early signs of that happening.

“Underneath the surface, there's massive rotation underway,” wrote Bespoke in a note to clients. “Q2's biggest winners are getting pummeled, while Q2's losers are soaring.”

Bespoke crunched data on the Russell 2000, breaking stocks into ten baskets based on performance in the second quarter.

On July 1, the stocks that were in the worst-performing basket last quarter jumped 3.3%, according to Bespoke. The best performers? Well, those stocks dropped an average of 2.3%.

The 5.6% relative outperformance of the worst to best performers is pretty intriguing, but one day doesn’t equal a trend.

It’s possible that much of the gains by the worst performers are tied to the calendar flip, as money managers waited until July 1 to lock in profits on some of their best performers and rebalance weights toward the laggards.

"Tuesday felt like a lot of big upsets in the market as the ‘seeded’ players (the index movers) got rocked and the down-and-outers emerged," wrote veteran technical analyst Helene Meisler on TheStreet Pro. "Can the rally last this time? I think it has more than a day in it."

Meisler thinks the rotation to the laggards may continue, but don't get too excited. We similarly saw the down-and-out stocks jump about one month ago, and they still wound up underperforming by the end of the month.

Overall, Meisler thinks rotation may only help these stocks for a few weeks. She recommends that investors keep an eye on how the equal-weighted S&P 500  (RSP)  performs relative to the more closely watched market-cap weighted S&P 500  (SPY) , which everyone uses as their benchmark, for clues.

Related: Veteran fund manager sets bold new targets on Palantir, Nvidia stocks

Stocks kick off July with surprising twist first appeared on TheStreet on Jul 2, 2025

This story was originally reported by TheStreet on Jul 2, 2025, where it first appeared.