Tech giants falter, small caps lead! Goldman Sachs: This round of market rotation in U.S. stocks may be more profound than expected.

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The U.S. stock market is undergoing a structural rebalancing. Tech giants and semiconductor stocks have experienced their biggest weekly pullback since last year's "Tariff Day", while small-cap stocks, biotech, and airline/travel sectors have strengthened against the trend, with increasingly clear signals of market rotation.

Peter Callahan, Goldman Sachs' top tech stock strategist, stated last week that the past week was one of the most eventful in his recent memory—momentum factors fluctuated sharply, market breadth expanded significantly, and the AI narrative became divided, causing investors to question their logic for holding tech leaders. The S&P 500 index closed lower for five consecutive trading days and fell below its 50-day moving average. Meanwhile, the Russell 2000 index (R2K) set a new all-time high last Friday.

This divergence has sparked intense debate over a central issue: Is the current weakness in tech stocks merely a quarter-end disturbance, or the beginning of a more lasting style shift? Callahan and his team used a series of charts to systematically review the most noteworthy structural changes in the market.

Small-cap stocks lead strongly, marking the largest outperformance in over twenty years

So far this year, the Russell 2000 index has outperformed the S&P 500 by about 1240 basis points. Callahan pointed out, if this trend continues until year-end, it will mark the largest annual outperformance of small-caps vs. large-caps since 2003.

Meanwhile, the performance gap between the Nasdaq 100 index (NDX) and its equal-weight version (NDXE) is approaching historical highs. Over the past decade, NDX has lagged NDXE by about 6 percentage points, nearing extreme levels except for the 2022 interest rate shock—this means the concentration premium in large-cap tech stocks is being repriced by the market.

The expansion of market breadth is evident across multiple sectors. Biotech's five-year chart shows a breakout pattern, with similar trends in housing, travel, REITs, and regional banks. Last Friday, lagging stocks from the past 12 months rose more than 5% in a single day, further strengthening signs of rotation.

AI and semiconductors face "givebacks", but fundamentals still supportive

The semiconductor sector recorded its largest weekly decline since "Tariff Day" last week. Some AI and AI-related leaders that were strong in Q2—such as AKAM, NVTS, QCOM, VRT, IONQ, etc.—have quietly given back much or all of their previous excess gains. Callahan called this "possibly a healthy reset in certain situations."

However, he noted an important backdrop: The semiconductor sector rose about 95% cumulatively in April and May this year; the current adjustment is more a digestion after a rapid rally than a reversal of trend. The chart of Nvidia (NVDA) versus the S&P 500 shows the stock remains in a "normal alternating pattern of rally and consolidation".

Within semiconductor equipment, divergence this year is also notable—the performance gap between AMAT and ASML has widened to about 80 percentage points. Callahan believes this difference is hard to attribute to a single factor, possibly involving differences in end market exposure, portfolio structure, and the mean reversion effect after LRCX and KLAC led in 2025.

Earnings expectations high, concentration risk remains a concern

With the upcoming Q2 earnings season, expectations for overall S&P 500 earnings growth have climbed to 22% year-on-year, the highest pre-earnings level since 2021.

However, Goldman Sachs Global Investment Research (GIR) data shows that the median S&P 500 constituent company's expected earnings growth is just 9%, roughly in line with median levels for 2024-2025—meaning overall high growth depends heavily on a handful of leading companies.

Specifically, AI infrastructure-related stocks are expected to contribute nearly 60% of the S&P 500's Q2 earnings growth; the top ten contributing stocks are expected to account for about 75% of the total earnings growth, with Nvidia (NVDA) and Micron (MU) together expected to contribute over 40%.

Meanwhile, the gap between the S&P 500's top ten constituents' market cap share and earnings contribution share has narrowed to its lowest level in years. Callahan believes this narrowing "scissors gap" is worth continued attention—it may reflect more reasonable valuations for leaders, or signal the market reassessing concentration premiums.

Large software stocks remain "absentees", outlook for the second half remains uncertain

Despite the warming narrative of expanding market breadth, large software and IT service stocks have failed to effectively participate in this rebound. Charts for CRM, INTU, ADBE, ACN, etc. show these companies are noticeably absent in recent market rotation, forming a stark contrast to the strength of biotech, travel, and other sectors.

Looking ahead, Callahan notes this week's macro calendar is dense—the US ISM Manufacturing data, JOLTS job openings, nonfarm payrolls, and geopolitical developments will arrive in succession as key drivers for market pricing. The central issue remains unresolved: Is the current market shift a persistent theme for the second half, or just a brief pause before AI engines sprint again? Investors are closely watching incoming data and earnings to find the answer.

Risk Warning and Disclaimer ClauseThe market has risks, invest with caution. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial circumstances, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their specific situation. Investing based on this is at your own risk. ```