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Investors' hope for a smooth market rotation to new bull leaders ruined Thursday

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Investment Strategy News

Stock Markets,Russell 2000 Index,S&P 500 Index

The tech-heavy Nasdaq Composite lost more than 3% on Thursday, and the Russell 2000 small-cap benchmark lost even more.

All three major indexes pulled back on Thursday — and even small-caps couldn't escape the red —thwarting hopes for a smooth transition to new bull leadership that would keep lifting the overall market. The new market theory was that investors would sell some of their high-flying technology winners and buy small cap laggards primed for a comeback when the Federal Reserve begins cutting rates.

"If you look in small caps, they don't have their earnings follow through. So you really need to build that case," said Colmar. Otherwise, July was "just a technical bounce that'll wither out," he added. The negative effects of an economic recession — the big worry in the market Thursday — would likely offset any benefit small caps would receive from lower rates. Wells Fargo Investment Institute's Sameer Samana similarly debunked the market rotation.

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