Big Tech Fatigue Gives Dow a Boost. How It Could Hit 50,000 This Year.

The Dow Jones Industrial Average has sharply outpaced the S&P 500 this month. (NYSE)

Key Points

• Investors are shifting from tech stocks to more stable alternatives, with the Dow Jones Industrial Average gaining 4.75% over the past month.
• Healthcare and materials stocks have seen significant gains in November, rising 5.9% and 3.3% respectively, while the S&P 500’s information technology index fell 2.1%.
• The probability of a December Federal Reserve rate cut has decreased to 55%, down from 70% a week ago.

Investors are starting to lighten their exposure to tech stocks and opting for less exciting but possibly more stable alternatives heading into the final weeks of the year.

The nascent rotation has helped the Dow Jones Industrial Average , a benchmark heavy with cyclical and defensive stocks, outpace both the S&P 500 and the Nasdaq Composite over the past month and close above 48,000 on Wednesday at the highest level on record.

The Dow, in fact, could reach 50,000 points by the end of the year and possibly top that historic threshold before the S&P 500 breaches the 7000 point mark, if the tech rotation continues and the Federal Reserve maintains its hawkish stance on interest rates over its final policy meeting of the year in December.

“AI has been the defining market theme of the past two years—but even powerful trends can experience fatigue,” said Charu Chanana, chief investment strategist at Saxo Bank.

“Investors are selectively rotating within tech rather than abandoning it,” she added. “Instead of exiting tech, they’re balancing AI-heavy portfolios with sectors that have clearer demand drivers, more predictable fundamentals, and valuations that aren’t stretched.”

That’s helped the Dow gain around 4.75% over the past month, besting the 2.95% advance for the S&P 500 and a 3.1% gain for the tech-focused Nasdaq.

Healthcare and materials stocks, which have trailed the broader market over the past six months, have swung sharply into positive territory over the month of November, rising 5.9% and 3.3% respectively. The S&P 500’s information technology index, meanwhile, has fallen 2.1%.

Created with Highcharts 9.0.1Source: FactSet

Created with Highcharts 9.0.1Dow industrialsNasdaqS&P 500 Oct. 17Nov.01234567%

“48,000 was our year-end target on the Dow so we have rebounded in dramatic fashion from the April lows,” said Eric Teal, chief investment officer for Comerica Wealth Management. “The market is broadening out beyond just growth and technology, including industrials, financials, and healthcare.”

Others have noted SoftBank’s sale of its entire stake in Nvidia , which raised $5.8 billion for the Japan-based conglomerate’s own AI ambitions, as evidence of fatigue in the sector.

“Nvidia remains the benchmark, but SoftBank’s exit shows that the smartest capital is now chasing where AI meets application, data, and monetization,” said Brad Gastwirth, global head of research at Circular Technology LLC.

An extension of this mini-rotation could slow the S&P 500’s advance into the end of the year, given the fact that the biggest tech stocks comprise around 35% of the benchmark’s overall performance.

Tech tends to outperform as interest rates decline, as well, and markets are starting to pare bets on a December rate cut from the Fed amid a dearth of official economic data that leaves concerns over elevated inflation pressures unchecked.

“Absent evidence of a notable labor market deterioration, I would be hesitant to ease policy further, especially given the limited information on inflation due to the government shutdown,” Boston Fed President Susan Collins told an event in her home city last night.

The CME Group’s FedWatch, meanwhile, pegs the odds of a December Fed rate cut at just 55%, down from around 70% a week ago and as high as 95% in early October.

Still, investors would be wary of writing off the AI-led tech trade completely. Nvidia will post its fiscal third quarter earnings next week, and likely guide markets on near-term demand for its sector-dominating chips that will generate nearly $62 billion in revenue for the three months ending in January.

The S&P 500’s three tech-heavy sectors—consumer discretionary communications services, and information technology—will contribute nearly half of the collective $597 billion in profits the benchmark is expected to earn over the fourth quarter.

“Big tech stocks continue to lead this market, and for good reason, since many of these companies are producing ample cash flows to fund this massive spending on AI,” said Carol Schlief, chief market strategist at BMO Private Wealth.

“We expect markets to grind higher—though likely with continued volatility,” she added. “But don’t overlook AI exposure, it’s a key component of a portfolio.”

Write to Martin Baccardax at martin.baccardax@barrons.com