Mega-cap stocks have led U.S. market rally so far this year. Here’s why that could change in the third quarter.

“As we head into a new quarter, we think the odds of a significant mean reversion in the value vs. growth trade are quite high,” as the yield of 2-year Treasury
TMUBMUSD02Y,
4.895%
on Thursday surged to the highest level since early March, Krinsky wrote in a Thursday note.

Mean reversion refers to an assumption that assets’ prices will tend to revert to the long-term average over time.

This divergence between growth and value stocks will likely resolve “with value moving a bit higher and growth moving meaningfully lower,” noted Krinsky. “Essentially, this also suggests that small-caps vs. mega-cap growth should have some decent upside reversion.”

Meanwhile, the technical set-up remains for a “more significant broad-based selloff” in U.S. stocks later this year, Krinsky noted.

The COBE 6-month implied correlation, an index measuring the average expected correlation between the top 50 stocks in the S&P 500 index, is at the lowest level since 2006.

“Rising correlations should be anticipated in the coming months,” Krinsky wrote. Rising correlations typically correspond with falling equities.

U.S. stocks traded mostly higher Thursday, with the Dow Jones Industrial Average
DJIA,
+0.84%
up 0.6% and the S&P 500 up 0.2%. The Nasdaq Composite fell 0.2%, according to FactSet data.