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The stock market received a boost at the end of a turbulent week as key economic data fueled speculation that the Federal Reserve may set the stage for a rate cut in September.
Federal Reserve's Impact on the Market
Every major group in the S&P 500 rose on Friday amid bets that the Fed's easing cycle will continue to support Corporate America. This broadens the bull market beyond a narrow group of companies. While big tech has seen substantial gains this year, concerns about concentration risk surfaced after a disappointing start to the megacap earnings season.
The rotation into economically sensitive shares, which began earlier this month, followed Fed-friendly data. Small caps, which have rallied 10% in July, are typically more sensitive to high rates due to their higher debt loads and fragile balance sheets. These stocks perform better when borrowing costs decrease.
Economic Data and Market Reactions
Friday's economic data reinforced those bets. The Fed's preferred measure of underlying US inflation, the core personal consumption expenditures price index, rose at a mild pace in June, while consumer spending remained healthy. Additionally, US consumer sentiment dropped to an eight-month low in July.
"The Fed can still set the table at the July meeting and serve the first cut in September," said Tim McDonough at Key Wealth.
The S&P 500 rose 1.3%, the Dow Jones Industrial Average rose 1.7%, and the Nasdaq 100 rose 1.2%. The Russell 2000 of small caps climbed 1.3%. Homebuilders reached a record high. 3M Co. and drugmaker Bristol Myers Squibb Co. jumped on bullish outlooks. Treasury 10-year yields dropped four basis points to 4.2%.
Shifts in Market Trends
The rotation away from big tech comes after a massive rally that pushed the S&P 500 to nearly 40 record highs this year. Investors, who for months saw few alternatives to the narrow band of stock-market winners, now face more options if the Fed moves to lower interest rates soon.
"A meaningful rotation from large-cap growth into SMID-cap value has been underway, and we think that will continue," said Craig Johnson at Piper Sandler. "Our breadth indicators confirmed this seismic shift, along with the technical evidence that investors are reducing their concentration risk in the 'Lag Seven' and other large-cap leaders."
An equal-weighted version of the S&P 500, where companies like Nvidia Corp. have the same weight as Dollar Tree Inc., is outperforming the US equity benchmark for a third consecutive week. This shift comes as optimism over eventual monetary easing pushes investors away from the perceived safety of tech megacaps.
The Fed is expected to signal plans to cut interest rates in September, according to economists surveyed by Bloomberg News. Nearly three-quarters of respondents believe the US central bank will use the upcoming meeting to prepare for a quarter-point cut in September.
"It seems the tide has finally turned," said David Russell at TradeStation, addressing the latest inflation data. "Investors can now focus on the big earnings next week and worry less about prices and rates."
Indeed, traders are eagerly anticipating a slew of earnings reports from big tech companies. The stakes were already high for the group heading into this earnings season, and they have risen further after underwhelming results from some megacaps. Apple Inc., Microsoft Corp., Amazon.com Inc., and Meta Platforms Inc. are all set to report earnings next week.
"The earnings issue will likely remain significant as we move into August," said Matt Maley at Miller Tabak + Co. "If this earnings season continues to weigh on tech stocks, investors might start rotating into cash instead of small-cap stocks."
The rally in the largest US technology stocks is at risk of fading further if the US economy continues to cool, according to Michael Hartnett at Bank of America Corp.
The strategist, bullish on bonds for the second half of 2024, indicated that signs of an economic slowdown could drive a rotation into stocks that have lagged behind the expensive tech megacaps this year.
In a note on Friday, Hartnett mentioned that recent data suggested the global economy was "ill," and that "we are one bad payroll away" from big tech stocks losing their dominance.
Corporate Highlights
McDonald’s Corp.’s new $5 meal deal has led to a modest increase in US visits and brought back some low-income diners, marking the first signs that the burger chain’s strategy to appear more affordable is paying off.
Apollo Global Management Inc. has agreed to buy International Game Technology Plc’s gaming division and the gambling machines company Everi Holdings Inc. in a $6.3 billion, all-cash deal that will merge the two businesses.
Apple Inc. lost ground in China’s smartphone market in the June quarter as local companies like Huawei Technologies Co. surged ahead.
Dexcom Inc. plunged after the maker of blood sugar monitoring devices for diabetics unexpectedly slashed its 2024 sales guidance, surprising Wall Street.
Market Moves
Stocks: The S&P 500 rose 1.3%, the Nasdaq 100 rose 1.2%, the Dow Jones Industrial Average rose 1.7%, the MSCI World Index rose 1.1%, the Bloomberg Magnificent 7 Total Return Index rose 1.1%, and the Russell 2000 Index rose 1.3%.
Currencies: The Bloomberg Dollar Spot Index was little changed, the euro rose 0.1% to $1.0861, the British pound rose 0.2% to $1.2871, and the Japanese yen rose 0.1% to 153.77 per dollar.
Cryptocurrencies: Bitcoin rose 3.3% to $67,398.26 and Ether rose 3% to $3,247.4.
Bonds: The yield on 10-year Treasuries declined four basis points to 4.20%, Germany’s 10-year yield declined one basis point to 2.41%, and Britain’s 10-year yield declined three basis points to 4.10%.
Commodities: West Texas Intermediate crude fell 1.4% to $77.16 a barrel and spot gold rose 0.8% to $2,383.72 an ounce.
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