By Jacob Sonenshine

Tech stocks are taking a pause from their outperformance, and other sectors are shining, a signal any stock market bull wants to see.

The S&P 500 Information Technology Sector Index, lead by high-growth names such as Nvidia, Broadcom, Microsoft, and Meta Platforms, is up 136% in the past five years, beating the entire S&P 500 index's 92% gain. The reason: Big Tech's earnings have grown faster than other sectors' because of artificial intelligence, which has expanded customer demand for cloud services, chips, and other services. AI is more efficient and cost-effective, so businesses are paying higher prices for cloud services and adopting more cloud and digital advertising offerings from Big Tech.

Now, Big Tech is taking a back seat to other sectors. The group of behemoth tech stocks represents a little more than a third of the S&P 500's market value, near its highest portion ever, so it makes sense that it is giving back a bit of its recent outperformance. In fact, fund managers' average holdings of tech stocks as a percentage of their portfolios dropped in August from July, according to Bank of America, as managers increased their allocation to banks, energy, and utilities.

That dynamic surfaced Tuesday through Wednesday, when the market celebrated lower-than-expected inflation and the possibility of a Federal Reserve interest-rate cut in September. The financials sector gained 1.8%, better than the tech sector's 1.6% rise.

Consumer discretionary rose 2.4%, while materials rose 3.2%, and healthcare gained 2.3%. It's not that investors are souring on tech, but that they are becoming excited about other sectors, while tech stocks have already priced in much of their expected earnings growth.

"As long as the positive set up of 1) Mostly tame inflation, 2) Looming Fed rate cuts, 3) Tariff clarity and 4) Solid earnings remains in place, we'd expect this broadening and cyclical outperformance to continue," writes Sevens Report's Tom Essaye.

Earnings for non-tech look ready to grow. Not only are consumers spending a bit more -- a positive for lenders, companies that sell building materials, and a whole ecosystem of industries -- but lower rates give the market a boost of confidence that growth can continue. Analysts covering consumer-discretionary companies, for example, expect sales, in aggregate, to grow almost 5% annually for the two years after 2025, according to FactSet. That would help bring profit margins higher and push earnings up 13%.

A similar story is true for the financials sector, which is close to breaking out to new highs. For banks, analysts expect revenue growth on the back of stable loan demand, growing deal activity, and strong trading activity. Meanwhile, these companies are reducing their cost structures by investing in artificial intelligence instead of hiring new employees, which can boost margins.

"We recommend an overweight financials," writes Trivariate Research's Adam Parker, citing a better-than-expected slate of second-quarter earnings for a diversified group of banks, insurers, and asset managers that have "multiple ways to win."

Elsewhere, healthcare stocks look resurgent. The sector dropped by double digits from record peaks last August as UnitedHealth Group faces stricter rules that could cause higher reimbursement expenses, while drug makers face potentially new rules on pricing. But the market priced in those challenges: The stocks are trading at extremely cheap valuations and investors are now buying the dip.

Healthcare could easily continue to gain. Demand for health insurance and drugs won't waver if the economy does falter. Parker points out that analysts expect sales and earnings growth for the entire sector as consumers age and increasingly sign up for health services, while hospitals buy more supplies from companies such as Boston Scientific and Stryker.

The point is that the rally includes more than just tech stocks -- and that's a great signal for the market. Broad participation indicates confidence in the economy and that the rally is sustainable. Tech could falter in the near term, but "it's important to also acknowledge that the economy could stay resilient," Essaye writes.

The takeaway: Just stay invested in the market -- whether Big Tech outperforms or not.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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August 14, 2025 14:06 ET (18:06 GMT)

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