When the Federal Reserve enters a rate-cutting cycle, the tech giants' "leading myth" may come to an end.

The team of strategists from the US stock market and quantitative investment strategy director at Bank of America (BofA), Savita Subramanian, recently stated that the "US Regime Indicator" compiled by Bank of America recorded the largest increase in over a year in July. This indicates a significant potential signal of the US business cycle fundamentals transitioning from a "downturn" to a "recovery". According to Bank of America's proprietary index division, the "Nifty 50" - the top 50 stocks in the S&P 500 index by market cap (BofA custom group), rebalanced monthly; with market cap-weighted and equal-weighted versions. The "Not-so-Nifty 450" - the remaining 450 stocks in the S&P 500 index (those after the top 50 by market cap), also rebalanced monthly, also providing market cap-weighted and equal-weighted versions. Will the "Not-so-Nifty 450" completely outperform the "Nifty 50"? The "US Regime Indicator," a proprietary tool from Bank of America designed to measure the current stage of the US business cycle, has shown a significant momentum shift, attracting the attention of global market strategists. The team led by BofA strategist Subramanian stated, "The continued improvement in August will be an early confirmation signal of the transition from downturn to recovery." Additionally, the Bank of America strategists emphasized that when the transition is achieved for two consecutive months in the new regime, this shift will become more "official". Historical data shows that during previous business recovery periods, the market cap-weighted expansion of the "Not-so-Nifty 450" index was twice that of the "Nifty 50" index. The Bank of America strategist team suggests that in the "recovery" framework of the "US Regime Indicator," funds are more likely to overflow from the seven most crowded tech giants, driving a much stronger valuation restoration and relative return recovery for the "remaining 450" stocks in the S&P 500 index. Historical data shows that the so-called "Nifty 50" (the top 50) have averaged trailing by about 3.3 percentage points per year during this cycle, with only 36% of the recovery periods outperforming them. Bank of America's market value analysis shows that since March 2015, the market cap-weighted S&P 500 index has significantly outperformed its equal-weighted version, with the former rising by 161% compared to about 81% for the latter. Meanwhile, the "Magnificent Seven," comprising the top seven tech giants with heavy weightings in the S&P 500 index and Nasdaq 100 index, have been the core driving force behind the record highs in the S&P 500 index. The significant disparity in performance between the benchmark for large-cap stocks and small-cap stocks in the US stock market suggests that the leading position of large-cap stocks may continue. The "Magnificent Seven," with approximately 35% weight in the S&P 500 index and the Nasdaq 100 index, have been crucial in pushing the market to new highs. With tech giants like NVIDIA, Microsoft, and Google enjoying continued gains due to the unprecedented AI boom, the market's interest in large-cap tech stocks has surged. The strategists at Bank of America believe that this trend may be nearing its end. In the context of a potential rate cut by the Federal Reserve and a shift towards a "recovery" in the US Regime Indicator, the mega-bull market in large-cap stocks could be nearing its peak. This potential major shift could have a significant impact on investors heavily invested in large-cap tech stocks (IYW). As the Federal Reserve begins a rate cut cycle, could the moment for the rise of the "Not-so-Nifty 450" and small-cap stocks be approaching? Research shows that the improvement in Bank of America's "Regime Indicator" has been broad-based, with six of the eight original inputs showing positive changes in July. Strengthening factors include earnings per share (EPS) revision ratios, inflation, GDP forecasts, 10-year US Treasury yields, capacity utilization, and high-yield bond spreads. However, Subramanian and the strategist team pointed out in their report that leading economic indicators and the ISM purchasing managers' index weakened simultaneously. Since February 2022, the indicator has swung back and forth between different business cycle stages, mainly due to the drastic fluctuations in macro signals. According to Bank of America's strategists, the recent significant fluctuations stem from the "back and forth effect of inventories and demand - first from the negative economic and supply chain impacts of the COVID epidemic, and this year from the market's anticipation of progress on Trump's tariffs." Despite some inconsistent factors in history, the strong reversal performance of multiple input items suggests that this business cycle recovery signal has more staying power than previous "false start" signals. However, the strategists maintain a cautious stance on declaring a clear trend. The BofA strategists suggest that as the market becomes increasingly cautious about the high valuations of the "Magnificent Seven" tech giants, combined with recent economic data indicating a "soft landing" for the US economy, and traders in the interest rate futures market betting on two rate cuts by the Federal Reserve starting in September and restarting a rate-cutting cycle, mid-cap and small-cap stocks (particularly micro-caps) are entering a structural opportunity. However, investors need to focus on high-quality factors and low-risk factors to hedge against economic downturn risks in mid-cap stocks, avoiding high-leverage consumer stocks and high-risk tech stocks with unrealized gains and losses. If the Federal Reserve formally starts a rate-cutting cycle and the US economy shows robust resilience for a "soft landing," the uptrend in the US stock market is highly likely to continue rotating beyond the "Magnificent Seven" tech giants to those "Not-so-Nifty 450" and mid-cap stocks that have long underperformed the seven giants since 2022. These stock targets, theoretically speaking, are extremely sensitive to the Fed rate expectations, with even a slight rate cut likely to improve their battered stock prices and valuations, especially for high-quality mid-cap stocks with performance support. Under a Fed rate-cutting backdrop, these companies' long-standing pressure from the debt side is likely to significantly reduce, thereby potentially increasing profit margins and stock valuations. The following are the stocks compiled by Bank of America strategists in the S&P 500 index (stock code in brackets), with a forward price-to-earnings ratio (Forward P/E) lower than the median, a beta higher than the median (>1 indicating higher volatility than the US stock market, <1 indicating much lower than the market), and a market cap lower than the market median, all while receiving a "buy" rating from Bank of America analysts. These stock targets are also core recovery narrative targets for the "Not-so-Nifty 450" index: United Airlines (UAL) - Forward P/E: 7.7; Beta: 1.3 Devon Energy (DVN) - Forward P/E: 8.0; Beta: 1.1 Host Hotels & Resorts (HST) - Forward P/E: 8.1; Beta: 1.2 Delta Air Lines (DAL) - Forward P/E: 8.4; Beta: 1.4 Synchrony Financial (SYF) - Forward P/E: 8.4; Beta: 1.3 Aptiv (APTV) - Forward P/E: 8.9; Beta: 1.3 Healthpeak Properties (DOC) - Forward P/E: 9.0; Beta: 1.1 First Solar (FSLR) - Forward P/E: 9.0; Beta: 1.3 Halliburton Co. (HAL) - Forward P/E: 9.1; Beta: 1.1 Eastman Chemical Co. (EMN) - Forward P/E: 9.3; Beta: 1.2 BXP (BXP) - Forward P/E: 9.3; Beta: 1.1 PulteGroup (PHM) - Forward P/E: 9.6; Beta: 1.2 Hewlett Packard Enterprise Co. (HPE) - Forward P/E: 10.0; Beta: 1.3 KeyCorp (KEY) - Forward P/E: 11.1; Beta: 1.1 Steel Dynamics (STLD) - Forward P/E: 11.2; Beta: 1.3 Mohawk Industries (MHK) - Forward P/E: 11.4; Beta: 1.2 Expedia Group (EXPE) - Forward P/E: 11.5; Beta: 1.4 Mosaic Co. (MOS) - Forward P/E: 12.5; Beta: 1.1 Federal Realty Investment Trust (FRT) - Forward P/E: 12.6; Beta: 1.1 Lululemon Athletica (LULU) - Forward P/E: 13.3; Beta: 1.1 Smurfit Westrock (SW) - Forward P/E: 13.6; Beta: 1.1 Western Digital (WDC) - Forward P/E: 14.1; Beta: 1.4 Nucor Corp. (NUE) - Forward P/E: 14.5; Beta: 1.5 IQVIA Holdings (IQV) - Forward P/E: 14.9; Beta: 1.2 Northern Trust (NTRS) - Forward P/E: 15.2; Beta: 1.2 Regency Centers (REG) - Forward P/E: 15.3; Beta: 1.0 Seagate Technology (STX) - Forward P/E: 15.7; Beta: 1.3 International Flavors & Fragrances (IFF) - Forward P/E: 16.0; Beta: 1.0 Weyerhaeuser (WY) - Forward P/E: 16.7; Beta: 1.1 Dover (DOV) - Forward P/E: 18.4; Beta: 1.2