Rotation Is Back: Why Tech Is Falling Out of Favor | Kenny Polcari

Well, good morning. Yes, it's me, Kenny Polcari, your host of the party. Today is Monday, July 6th, 2026, and here are the things that you need to know to get your day started. Well, today is the first day of trading for the Trump accounts, right? The opening bell is due to be rung from the White House. Each account now has $1,000 in it, compliments of the federal government. SpaceX, SPCX, is going to be added to the QQQ index tonight. Oh my God, all kinds of buying. We'll talk about that in a moment. Earnings, well, they're just a week away and the bar has been raised. OPEC+, well, they're going to raise production. Oil prices are falling. There's lots of economic data in the weeks ahead. The next Fed meeting is on July 28th and 29th. And what do we have for dinner tonight? Well, we're going to have the cachorro-valho à argentiera. We'll get to that in a moment. Well, good morning. The 4th is now behind us and what a celebration it was. And we are now well into summertime. The midterms are getting closer, earnings season's about to start, and the Fed meeting is only 23 days away, leaving so many to take sides on what's the next move. Lots to discuss, so let's get going. Thursday— last Thursday may have been the most important trading day of the summer, not because of where the market finished, but because of what was happening underneath the surface.. Now remember, it was a holiday-shortened week. Volumes were subdued, and that always means that moves can be exaggerated. Most likely were. But, uh, let's see what happened. The Dow surged by 585 points. The S&P ended the day flat. The Nasdaq got taken out to the woodshed again, shedding 207 points as investors, traders, and even the algos continue to take money off the table in the big sexy names. The Russell, that lost 16 points. The transports gained 55 points. The equal-weighted S&P gained 65 points while the Mag 7 ended the day down 390 points or 1.1%. By far the worst performer of the day. Again, you got to think those big growth, uh, and expensive valuations, right? If you've been reading my notes over the past couple of weeks, we've been discussing the difference between rotation and liquidation. Thursday, that was just another example of that theme. This wasn't investors abandoning the market. This was about taking profits in some of the year's biggest winners and putting that capital to work in sectors that had been left behind. That's rotation, not liquidation. Here are the sectors that get hit: tech, consumer discretionary, communications, semiconductors, cybersecurity. Quantum names fell by 4%, but the real damage was in the memory stocks. The DRAM ETF, which is about memory stocks, sank 8%. MU down 5.5%. Western Digital down 9.9%. Seagate Technologies tumbling 10%. None of this should come as a surprise, though. These stocks have been among the market's hottest performers. So some profit taking after an extraordinary run is perfectly normal. At this point, it looks like more of a valuation reset than a change in the long-term AI story completely., right? Technically, STX has already broken below its short-term trend line. MU and WDC are now testing theirs. The next few sessions will tell us whether or not it's going to hold these levels or if there's another leg lower before buyers really step back in. So where'd the money go, right? It rotated into the more defensive and economically sensitive parts of the market, stuff that we've been talking about all along— utilities, consumer staples, healthcare, basic materials, real estate. Industrial, software, metals and mining, and the value stocks way outperformed growth, with value up about 1% on the day. What's important is what didn't happen. The VIX did not rise, it fell 2.7%, remaining firmly in the complacent zone, while the bond market was essentially unchanged, leaving the 2-year yielding 4.13%, the 10-year at 4.48%, the 30-year at 4.98%. In other words, there was no flight to safety, just a rotation out of some of the extended winners and into other areas of the market. We've been talking about this, this morning. Treasuries are catching a small bid, nudging yields a little, a little bit lower, 2 bps lower in the 2-year and 10-year, while the 30-year is, uh, is down 1 bps. The catalyst for Thursday's move in stocks was the June non-farm payroll report, and it was not terrible. It was just not as good as expected. For June, we created only 57,000 new jobs, half of what we expected. Average hourly earnings month over month and year over year came right in on target, but the unemployment rate unexpectedly fell from 4.3% to 4.2%, which sounds a little bit confusing. No, how can it fall when we created half the number of jobs? Well, the, the answer is fairly simple. The government only counts someone as unemployed if they don't have a job and they are actively looking for one. When people stop looking for work and they leave the labor force, they're no longer counted as unemployed. So even though the job growth was weaker, enough people exited the workforce, so the unemployment rate actually declined. Now, the market understood that, and immediately, so investors focused on the slowing job growth not the lower unemployment rate. And that reinforced the belief that inflation pressures are easing and that Fed Chair Kevin Walsh has less of a reason to tighten— think raise rates— which doesn't mean that he's going to really like to cut them either. It just means more holding and waiting and assessing the data. The next FOMC meeting takes place on July 28th and 29th. Between now and then, we are going to get a boatload of economic data as well as about 50% of the S&P earnings. So sit tight because there's going to be a lot going on. Now, next up, the start of second quarter earnings season, and this matters as this earnings season may prove to be one of the most important we've seen in years. Why? Because Wall Street analysts have raised the bar, creating a much higher hurdle for companies. According to FactSet, earnings growth expectations are now about 23% on revenue growth of about 11%. If it all clicks and works just as expected and companies hit those numbers, it would mark the second consecutive quarter of better than 20% profit growth. If it doesn't, then watch out below. And here's the part that you need to consider. Analysts don't simply wake up one morning and decide to raise their estimates. Those revisions usually reflect conversations with management teams and guidance coming out of the CFO offices. Companies, CFOs specifically, understand exactly where the expectations are. And if those numbers were unrealistic, management would push back. And use the latest example of that. Recall how many people thought that the estimates were way too robust, almost impossible to hit. Yet management said nothing. They kept quiet. And why? Because they knew that they were going to crush it. They kept their mouth shut because they knew that they were going to beat those numbers. If, if they thought the numbers were too high, they would have steered the analyst lower, because the last thing any CEO or CFO wants to see is their stock gets smashed on earnings day because the expectations were too high, especially in the tech space. I mean, come on, who is kidding who? So again, this earnings season isn't just about beating estimates, it's about the guidance as usual, and the need to raise guidance and convince investors that the enormous capital being poured into AI infrastructure is beginning to generate real sustainable profits. Now, the season unofficially kicks off next week with Pepsi, all about consumer demand, there on the 9th. Delta Airlines gonna be about travel demand, there on the 10th. And then it becomes official when the big banks hit the tape. JP Morgan, Citibank, Goldman Sachs, Wells Fargo, all reporting on the 14th. Now, while technology is going to once again command most of the headlines, this earnings season is shaping up to be much broader than just AI and the Mag Seven. Analysts are expecting strength across many of the economically sensitive sectors of the economy, including energy, industrials, materials, reflecting continued investment in infrastructure, manufacturing, and the buildout of the AI ecosystems. Financials are going to offer an important read on the health of the economy through loan growth, credit quality, and capital markets activity. Think sales and trading and investment banking. Uh, and recall, one of the key metrics that I like, uh, is the growth or not of the loan loss portfolio that these banks issue, because that gives you insight into what the C-suite really thinks about the economy and the consumer. If they raise their their, their loan loss reserves. That means they expect more defaults. Consumer discretionary, consumer staples are going to provide insight into whether Americans are still willing and able to keep spending. Now take this all together, and these reports should give us one of the clearest pictures yet of whether the American economy is really— is slowing to a more sustainable pace or continuing to support the market's optimistic outlook. Remember, investors don't want good enough. They will demand excellence. And by the way, the markets— the market doesn't want it either. Stocks are priced to perfection, so any sense of weakness, no matter how small, could produce outsized selling in those names. Now look, um, when expectations are this elevated, the margin for error becomes razor thin. Companies that beat expectations and raise guidance will likely be rewarded, as they should be, while companies that miss— and for— they miss a forecast or suggest that AI spending or consumer demand or margins are beginning to soften could face real selling pressure. So just be aware of that. Oil trading lower this morning, it's down 3/4 of a percent at $68.20. This on news that OPEC+ has decided to ramp up production beginning in August, and this continues to support the story of lower oil prices in the weeks and months ahead. And if that happens, it takes more pressure off of inflation. Gold, that's trading at $4,150 after finding support down at the $4,000 level that we've been talking about. The idea that the Fed will not raise rates is helping to support the story. And in fact, gold bugs continue to bet that rates will drop. And if that happens, gold should trade higher. The chart says that we're in this $4,000-$4,400 trading range. My sense is that rates will remain unchanged, and so gold will just continue to churn in here, right? I don't suspect it's going to take off. ECO data today includes the S&P Services PMI and ISM Services PMI, both expected to remain in the expansion zone. The ISM prices paid component is also to be reported today. That's expected to come in 67.5, down from 71, suggesting prices for services are coming down. And that's a positive, and one that further supports the idea of no rate hike. Recall last week's manufacturing PMI prices paid component also saw substantial decline as well. European markets this morning are mixed, not up or down big at all, uh, just continuing to digest the recent moves as investors there await the start of earnings season, also begins there next week. U.S. futures are up this morning. Dow futures up 36, S&P's up 35, the Nasdaq is up 315 points, and that makes sense after the beating they took last week. While the Russell's up 4. None of the indexes are either overbought or oversold on the RSI scale, so we can expect more churn here as the new week begins. SpaceX, like I said, is due to be added to the QQQ index tonight, and all that means is going to be more buying by the indexes and passive funds that mimic those indexes. So expect that stock to move higher. Remember, markets don't move in straight lines and trees don't go straight to the sky. New narratives evolve and leadership changes, and we're starting to see that. But disciplined investing never goes out of style. You can give me a call at 561-931-0190 to discuss your goals and your timeline, and let's assess the risk in your portfolio and your tolerance for volatility. And as usual, I'm always happy to give you a complimentary portfolio review and risk assessment. Okay, so what do we have for dinner? This isn't really dinner, it's an appetizer, and it's part of the cookbook series that I'm putting together. It's called Kashuk Cavallo all'Argentiera, and it serves 4 people just as an appetizer, right? Um, and there are few, uh, appetizers in Sicily that are more appetizing than this. Thick slices of semi-aged cascia cavallo ragusano are seared until the outside becomes beautifully crisp while the center melts into creamy perfection. A splash of vinegar and fragrant oregano and good olive oil transform a humble piece of cheese into something unforgettable. You serve it straight from the pan with warm, crusty Italian bread. Mm, delicious. For this, you need 14 ounces of semi-aged Cascavallo Ragusano cheese cut into half-inch slices. You need olive oil, 1 or 2 garlic cloves peeled and then cut in half. You need 2 tablespoons of white wine vinegar, a pinch of sugar, and a tablespoon of dried oregano. And you can always use black pepper. You can also use, it's optional, a light dusting of cornstarch because that's gonna give it an extra crisp crust. And then you need the warm Italian bread. Now begin by preparing the cheese. Slice the cheese into 1/2-inch slices, pieces. If you're gonna use the cornstarch, then dust both sides of it and then shake off any excess. Now in a large skillet, heat up the olive oil over medium heat. Add the garlic, let that cook in there for a couple of minutes just 'cause you want the oil to become fragrant. Remove the garlic now and discard. Now you wanna create the crust. So increase the heat to medium-high Carefully lay the cheese slices right into the hot oil. Resist the temptation to move them. Do not move them. Let them cook undisturbed for 1 or 2 minutes until a deep golden crust forms. Now here's the Argenteria moment. Turn each slice over and then immediately pour the vinegar mixed with a pinch of sugar around the cheese. The pan will hiss and steam as the vinegar rapidly evaporates. Let it cook for another 30 seconds to a minute until the second side browns and the center becomes soft and molten. Now you want to finish this by sprinkling it generously with some dried oregano and a bit of black pepper if you want. Don't, don't use too much. You want to serve this immediately with thick slices of warm Italian-style country bread. It's a perfect appetizer. Trust me, you're going to love this one. It is delicious. Until tomorrow, take good care.