NEW YORK, July 12 (Reuters) - Looming U.S. interest rate

cuts are presenting investors with a tough choice: stick with

the Big Tech stocks that have driven returns for more than a

year or turn to less-loved areas of the market that could

benefit from easing monetary policy.

Owning massive tech and growth companies such as Nvidia ( NVDA )

, Microsoft ( MSFT ) and Amazon ( AMZN ) has been a

hugely profitable strategy for investors since early 2023, even

as the stocks' market dominance has drawn comparisons to the

dot-com bubble of the late 1990s.

That calculus may start to change following Thursday's

surprisingly cool inflation report, which solidified

expectations for a near-term rate cut by the Federal Reserve.

Lower rates are seen as beneficial to many corners of the market

whose performance has lagged this year, including small-caps,

real estate and economically sensitive areas such as

industrials.

Market action at the end of the week showed a nascent shift

may have already begun. The tech-heavy Nasdaq 100

suffered its biggest drop of the year on Thursday while the

small-cap Russell 2000 had its best day of 2024. The

Nasdaq 100 has gained about 21% this year while the Russell 2000

is up just 6%.

Also on Thursday, the equal-weight S&P 500 - a

proxy for the average stock in the benchmark index - had its

biggest relative gain since 2020 over the S&P 500, which is more

heavily influenced by the largest tech and growth stocks. That

chipped away at the huge advantage for the S&P 500, which

remains up about 18% in 2024 against a 6.7% gain for the

equal-weight index.

"The trade got too one-sided and we're seeing some reversal

of this," said Walter Todd, chief investment officer at

Greenwood Capital.

Small caps and the equal-weight S&P 500 extended their gains

on Friday even as tech stocks rebounded.

Investors cautioned that the moves could be a snap-back

after the disparity in performance between tech and other market

sectors reached extremes. Further, recent periods of market

broadening have been short-lived: for example, small caps surged

at the end of 2023, when investors believed rate cuts were

imminent, only to lag in the following months.

Still, there are reasons for optimism about the broadening

trade. Fed fund futures on Friday were pricing in nearly 90%

odds of a 25 basis point rate cut at the central bank's

September meeting, according to CME FedWatch.

Smaller companies, including biotech firms, that are heavily

dependent on credit are among those that stand to benefit most

from lower rates, said Matthew McAleer, president and director

of private wealth at Cumberland Advisors. Industrial companies,

which can rely on debt for capital intensive projects, also

could be winners, McAleer said.

Equity valuations across the market could also become more

attractive if bond yields continue falling as traders price in

lower rates. Lower yields mean bonds offer less competition to

equities while stock valuations improve in many analysts'

models.

The benchmark 10-year Treasury yield, which moves inversely

to prices, was last around 4.2%, down some 50 basis points below

April highs. The S&P 500 was recently trading at 21.4 times

forward earnings, compared to a historical average of 15.7,

according to LSEG Datastream.

"If we can start to stall (near 4%) ... I think you're going

to see better breadth across multiple areas in the equity

market," McAleer said.

Many are skeptical that investors will stay away from shares

of megacap companies, which are expected to be more resilient in

uncertain economic environments. Big Tech could be an appealing

destination if the U.S. economy starts to weaken more than

expected after months of elevated interest rates, said Chuck

Carlson, chief executive officer at Horizon Investment Services.

Megacap tech stocks are also at the center of the artificial

intelligence theme that has been exciting investors this year,

said Rick Meckler, partner at Cherry Lane Investments.

"You could see ... a broadening of stock buying," Meckler

said. "But I think as long as the AI thesis is dominating the

market, it's going to be difficult for these stocks to drop

significantly."

Any sustained move away from megacaps could spell trouble

due to their heavy weightings in indexes.

The S&P 500's year-to-date gains have been concentrated in

stocks like Nvidia ( NVDA ) and Microsoft ( MSFT ), and analysts have warned that

any weakness in them could hurt the major indexes.

If large cap tech stocks keep falling, "at some point, that

will cause the entire market to decline," Matthew Maley, chief

market strategist at Miller Tabak, said in a note on Friday.