The unstoppable rise of Big Tech in the stock market may be facing a new challenge as earnings outlooks for the rest of 2024 appear lackluster. Investors are now looking to other sectors for opportunities to keep share prices soaring.

Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, believes that broader market participation is necessary to sustain similar returns in the second half of the year. Fortunately, industries like materials and healthcare are expected to see significant profit growth of around 25% by the fourth quarter, following contractions of 20% or more in the first quarter.

Ohsung Kwon, equity and quantitative strategist at Bank of America, sees potential in sectors like energy, materials, consumer discretionary, industrials, and financials, stating that cyclical sectors are poised to perform better in the latter half of the year. This shift in sentiment is already underway, as clients at BofA withdrew approximately $2.2 billion from tech stocks in the week ending May 31, the second-largest outflow recorded by the bank since 2008. Meanwhile, consumer discretionary stocks received the largest inflows, despite being the second worst-performing sector in the S&P 500.

Nonetheless, this doesn't mean investors are abandoning Big Tech entirely. The S&P 500 has enjoyed a 12% increase this year, largely driven by the performance of its five largest stocks - Microsoft Corp., Apple Inc., Nvidia Corp., Alphabet Inc., and Amazon.com Inc. These companies have collectively added a staggering $2.9 trillion in market value in 2024 and have become the heavyweight sector in the S&P 500 with a 31% weighting.

While the pace of profit expansion for tech giants is slowing, they are still highly regarded for their quality, strong cash flow, and significant cash reserves, making them attractive investment options. However, challenging comparisons to their outstanding 2023 results present difficulties for these companies in maintaining their growth trajectory this year.

Big Tech's current challenge lies in justifying its lofty valuations. Tech stocks like Nvidia, Microsoft, Apple, and Alphabet are already trading at high multiples, ranging from 21 to 40 times projected earnings over the next 12 months. As other sectors begin to experience earnings growth, the premium that investors have been willing to pay for tech stocks may decrease.

The divergence in earnings outlooks among Big Tech companies is also becoming apparent. Nvidia stands as the standout performer, rising 144% this year, with Meta Platforms (formerly Facebook) and Alphabet not far behind. On the other hand, Microsoft has struggled to keep up, while Apple has had a relatively modest increase of just 2.3% in 2024. This divergence indicates that the once-unified strength of these tech giants is waning.

To fuel the stock market's success in 2024, the performance of Big Tech companies will be crucial. Given the transformative impact of artificial intelligence (AI) on various industries, technological advancements are expected to spill over into other sectors, driving their growth as well.

Despite the potential in other sectors, uncertainties and risks remain. Margins in the healthcare industry remain shaky due to ongoing charges faced by major drug companies. Furthermore, while consumer discretionary and sectors tied to the health of the economy, such as industrials and financials, are expected to contribute to profit growth, there are inherent risks within these groups.

As the stock market balances on the reliance of Big Tech, their ability to deliver on their profit outlooks will shape the trajectory of the market. With AI set to revolutionize multiple sectors, the positive performance of these tech giants has the potential to benefit the broader economy and fuel the stock market rally further.

Overall, investors are beginning to explore opportunities outside of Big Tech as the growth rate of these companies slows down. The shift in sentiment towards other sectors reflects a need for broader market participation, and industries like materials, healthcare, consumer discretionary, industrials, and financials are likely to witness increased investor interest as the year progresses.