Despite a solid start to the second quarter corporate earnings season, the S&P 500 tumbled almost -2% last week under the weight of a continued rotation out of technology stocks in favor of small cap stocks that had lagged their large cap peers by a wide margin in the first half of the year. It marked the worst weekly performance for the S&P 500 since mid-April and snapped a two-week streak of gains. The tech-heavy Nasdaq fell even further last week with a -3.7% loss, while the Dow Jones was able to eke out a 0.7% gain with its lower tech weighting. Meanwhile, the Russell 2000 small-cap index posted a 1.7% gain last week.

The unwinding of the tech trade was sparked by the combination of the soft June consumer inflation report and the tepid June nonfarm payrolls report earlier this month. With inflation seemingly moving in the right direction and the highly resilient labor market finally showing signs of slowing, market odds have surged for rate cuts to begin in September. As a result of a resurgence in optimism for a soft landing with easing financial conditions and moderating but stable economic growth, investors have gained confidence to take some profits from red-hot tech stocks and redeploy into other assets such as defensive and value sector and small-cap stocks.

Technology was also in the spotlight Friday with a defect in a CrowdStrike content update for Windows hosts that led to the so-called "blue screen of death" on many Windows systems across the globe, affecting everything from airlines to banks and healthcare companies. Many have called the event the world's biggest IT outage.

Gains in technology stocks on the back of the artificial intelligence push has been one of the primary drivers of Wall Street's run over the last year and a half. With traders now rotating out of them, the S&P 500 has understandably come under pressure given its historic levels of concentration in large tech stocks. The weight of the top 10 stocks in the S&P 500 (which are mostly tech giants) is near record highs at 35%, and the information technology sector’s weight in the S&P 500 of roughly 32% is at levels last seen during the peak of the Dot Com bubble.

The Magnificent 7 technology stocks will get a big test over the next two weeks, as several of the members are slated to report quarterly results amid an overall deluge of earnings reports. First up will be Google-parent Alphabet, which reports results today after the market close. The mega-cap tech stocks will have a high bar to clear with consensus analyst forecasts pointing to collective second quarter EPS growth of 28% year-over-year compared to roughly 10% EPS growth for the S&P 500 as a whole (or 6% growth for the S&P 500 excluding the Magnificent 7).

In addition to a ramp in quarterly earnings report this week, investors will be digesting the news that President Biden will not be seeking reelection. Biden announced he is dropping out of the presidential race on Sunday and is throwing his endorsement behind VP Kamala Harris. On the economic data side, the advanced reading of second quarter economic growth is slated for Thursday. This will be followed by the June reading of the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, which is expected to come in at 2.4% year-over-year (or 2.5% excluding volatile food and energy prices).