These underdog stocks are leading Wall Street gains in August while Big Tech takes a backseat. Will it last?

In August 2025, a notable shift has occurred on Wall Street, with underdog stocks—particularly in sectors like financials, housing, and small-cap industries—outperforming traditional Big Tech giants like Nvidia, Microsoft, and Amazon. This trend, driven by expectations of Federal Reserve interest rate cuts and a rotation into value and cyclical stocks, has raised questions about its sustainability. Below, I analyze the current market dynamics, highlight specific underdog stocks leading the gains, and assess whether this shift is likely to persist, drawing on available data and expert insights.

Why Underdog Stocks Are Leading

1. Anticipation of Rate Cuts: The prospect of Federal Reserve rate cuts, signaled by Chair Jerome Powell at the Jackson Hole symposium on August 22, 2025, has boosted sectors sensitive to lower borrowing costs. Housing stocks like D.R. Horton, Lennar, and Toll Brothers surged over 5% each, while building materials supplier Builders FirstSource jumped 8% and flooring company Mohawk Industries gained 7% on August 22, as reported by Investopedia. Small-cap stocks, tracked by the Russell 2000 index, rose nearly 4% that day, outperforming the tech-heavy Nasdaq. Lower rates reduce borrowing costs for capital-intensive industries, making these stocks attractive.
2. Rotation from Big Tech: Big Tech stocks, which dominated market gains in 2023 and 2024, underperformed in August 2025. Mega-cap tech stocks lagged as investors shifted toward value and cyclical sectors, per Edward Jones. For instance, posts on X show year-to-date returns for tech giants like Nvidia (+25.3%), Microsoft (+25.0%), and Meta (+24.9%), but others like Amazon (-2.8%), Apple (-17.2%), and Tesla (-19.8%) have faltered, reflecting a cooling of the AI-driven rally that fueled their earlier dominance.
3. Underdog Performance: Specific underdog stocks have shone brightly:

• Sezzle (SEZL): A buy-now, pay-later platform, Sezzle doubled its stock price since January 1, 2025, after strong Q1 earnings and raised guidance despite tariff disruptions, according to U.S. News. Its resilience in tough economic conditions has made it a standout.
• BigBear.ai (BBAI): This AI-driven defense tech company surged 412% over the past year and 70% in 2025, driven by a $385 million contract backlog and a Street-high $9 price target from H.C. Wainwright, per Yahoo Finance. Its focus on government contracts positions it as a niche player.
• Housing and Financial Stocks: Companies like Builders FirstSource and Mohawk Industries benefited from rate-cut optimism, while financials like Morgan Stanley (+12% Q2 revenue growth) and Goldman Sachs (+15% revenue growth) capitalized on investment banking rebounds, as noted by U.S. News.

Will the Trend Last?

The sustainability of underdog stocks’ outperformance depends on several factors:

Bullish Case for Continuation

• Sustained Rate Cuts: If the Fed implements rate cuts in September 2025, as anticipated, sectors like housing, small caps, and financials could continue to benefit. Larry Tentarelli of Blue Chip Daily Trend Report told Investopedia that these sectors are poised to gain the most from lower borrowing costs, potentially extending the rally.
• Value Stock Appeal: Growth stocks, particularly in tech, have high price-to-earnings ratios, making them vulnerable to corrections. The Motley Fool notes that value stocks, often undervalued relative to their fundamentals, tend to outperform during economic expansions with low borrowing costs, a condition met in August 2025.
• Diversification Trends: Investors are diversifying away from tech-heavy portfolios, as seen in the cooling of AI hype and increased interest in alternative funds, per U.S. News. Underdog stocks like Sezzle and BigBear.ai, with strong fundamentals and niche markets, could continue to attract capital.

Bearish Case for Reversal

• Tech Resilience: Big Tech’s influence remains significant, with companies like Amazon and Nvidia still driving market indices due to their size. The Washington Times reported that Amazon’s 2.3% gain on August 14, 2025, helped mask broader market losses, suggesting tech’s ability to rebound quickly. If AI or cloud computing regains momentum, capital could flow back to tech giants.
• Economic Uncertainty: Ongoing tariff concerns and inflation pressures, as highlighted by a 3.3% wholesale inflation jump in July 2025 (Washington Times), could disrupt the economic expansion needed to sustain cyclical stocks. Small caps and housing stocks are particularly sensitive to economic downturns.
• Limited Evidence of Long-Term Shift: The August rally may be a short-term rotation rather than a structural shift. The Motley Fool notes that growth stocks, despite volatility, have historically outperformed value stocks over long periods, suggesting tech could reclaim dominance if fundamentals remain strong.

Expert Insights

• Market Analysts: Edward Mills of Raymond James, cited in the Federal Reserve governor termination article, noted that market uncertainty could persist if external factors like political interventions or global trade tensions escalate. This could cap gains for underdog stocks reliant on stable economic conditions.
• Historical Trends: Investopedia highlights that growth stocks perform best during low-rate environments but can falter if inflation or geopolitical risks rise, as seen in 2022 when growth stocks took a beating. The current environment, with mixed inflation signals, adds uncertainty.

Local Context

In Kansas City, Kansas, where the tragic death of Police Officer Hunter Simoncic on August 26, 2025, has dominated local attention, the stock market’s underdog rally has not been a major focus. However, the national shift toward value stocks aligns with broader economic optimism, potentially benefiting local investors with diversified portfolios. Posts on X reflect mixed sentiment, with some users bullish on small caps—“Russell 2000 is killing it, finally some love for the little guys”—while others caution, “Tech will be back, don’t sleep on Nvidia.”

Conclusion

The August 2025 outperformance of underdog stocks in housing, financials, and niche sectors like AI-driven defense and buy-now, pay-later platforms is driven by rate-cut expectations and a rotation from overvalued tech stocks. Stocks like Sezzle, BigBear.ai, and Builders FirstSource exemplify this trend. However, the rally’s longevity hinges on sustained rate cuts, stable economic conditions, and continued investor appetite for value stocks. While short-term gains may persist into September, tech’s historical dominance and potential for AI-driven rebounds suggest a possible reversal unless macroeconomic conditions strongly favor cyclicals. Investors should monitor Fed policy, inflation data, and tech earnings, particularly Nvidia’s Q2 report, to gauge the trend’s staying power.

Sources:,,,,,,,,,,,

This article has been reviewed for grammar and clarity to ensure accuracy and readability for a U.S. audience.