Market Turbulence: Small-Cap Stocks Rise Amid Megacap Volatility

The S&P 500 and Nasdaq Composite ended lower on Thursday following a tech-triggered sell-off. Despite this, the Dow Jones Industrial Average rose, boosted by strong GDP data. Investors rotated from megacap stocks to small-cap stocks, seeking safer avenues. Anticipation builds for Federal Reserve rate cuts following favorable economic signals.

The S&P 500 and Nasdaq Composite ended lower on Thursday in fickle trading, ultimately failing to regain ground lost during the previous day's tech-triggered sell-off.

The Dow Jones Industrial Average hung onto its gains to close higher, after stronger-than-expected GDP data provided support, and small-cap stocks also rose as investors sought out value away from the megacaps. The small-cap Russell 2000 gained, partially recouping Wednesday's broad losses. The Dow was the best of the three main benchmarks as investors reassessed their recent flight to underperforming sectors.

Megacap stocks endured a volatile day. Having recovered from a shaky start, they were in mostly in positive territory at mid-afternoon, before some slipped late in the day. Alphabet's shares fell for a second straight day, but Tesla rose. Lackluster earnings from the Google parent and the electric vehicle maker had pummeled the so-called Magnificent Seven group of tech stocks on Wednesday, prompting the Nasdaq and S&P 500 to log their worst day since 2022.

"I think the market is kind of lurching," said Yung-Yu Ma, chief investment officer at BMO Wealth Management. "The concern had been building and yesterday was a bit of a crescendo of that concern, but some of that has been alleviated today." While investors are still trying to grapple with Wednesday's disappointing earnings reports, and political and economic uncertainty, Ma said ultimately recent data shows a resilient U.S. economy.

Thursday's gross domestic product report showed the U.S. economy expanded 2.8% in the second quarter versus an estimate of 2%. Inflation subsided, leaving expectations of a September Federal Reserve interest rate cut intact. All eyes are now on Friday's personal consumption expenditures price data to confirm bets of an early start to Fed rate cuts.

While heavyweight stocks have powered the market to all-time highs this year, Wednesday's sell-off reinforced fears that these stocks might be over-stretched and are in for more turbulence. This concern has driven value investors, speeding up their rotation into smaller-cap stocks and other sectors outside megacap technology.

The S&P Small Cap 600 rose on Thursday. According to preliminary data, the S&P 500 lost 27.52 points, or 0.51%, to end at 5,399.61 points, while the Nasdaq Composite lost 162.01 points, or 0.93%, to 17,180.40. The Dow Jones Industrial Average rose 87.38 points, or 0.22%, to 39,940.10.

Among earnings-driven moves, IBM shares jumped, also boosting the blue-chip Dow, after the tech company beat estimates for second-quarter revenue and raised the annual growth forecast for its software business. American Airlines rose after cutting its annual profit forecast. Southwest Airlines climbed after saying it would implement changes including ending open seating and offering seats with extra legroom.

Advances by airlines and logistics firms, including Old Dominion and J B Hunt, helped the Dow Jones Transportation Average gain. Ford slumped after the automaker's second-quarter adjusted profit missed estimates by a wide margin. Edwards Lifesciences tumbled after it missed second-quarter revenue estimates.

(With inputs from agencies.)