In summary
– The market has seen a shift from momentum/growth stocks and large-cap tech companies to the Russell 2000 and cyclical/value stocks, with major firms like Alphabet and Tesla retreating after their earnings reports, contributing to the S&P 500’s largest single-day drop since December 2023.
– Economic data suggests a ‘soft landing’ with a stronger-than-expected Q2 GDP growth of 2.8%, driven by consumer spending and a stable core PCE index, challenging the narrative of a looming sharp downturn and supporting the Federal Reserve’s cautious policy stance.
– Fixed income markets have reacted with lower 2-year Treasury yields and a steepening yield curve, while ~70 bps of rate cut is now priced in until the end of the year.
Download this update as a PDF with accompanying data tables
The market has recently experienced a rotation in sentiment, with sectors such as the Russell 2000 and cyclical/value segments showing renewed vigour. This pivot has been at the expense of previously favoured momentum/growth stocks and the so-called ‘Magnificent Seven’ megacap technology companies. The initial batch of earnings reports from major players like Alphabet and Tesla fell short of investor expectations, intensifying existing worries about the lofty expectations for second-quarter earnings and the scrutiny over artificial intelligence investments, particularly in terms of capital expenditure versus their contribution to monetisation and productivity. This sentiment was reflected in the S&P 500’s most significant single-day retreat since December 2023, ending a remarkable 356-day run without a 2% or greater drop. Alphabet surpassed forecasts for revenue and earnings, largely due to its cloud and advertising businesses, yet its share price suffered post-earnings call, which alluded to potential cost-related headwinds. Meanwhile, Tesla’s shares also declined as the company reported lower-than-expected earnings for the fourth quarter in a row and delayed its Robotaxi event to October.
The narrative of a ‘soft landing’ for the economy is bolstered by the latest data, which includes a second-quarter Gross Domestic Product (GDP) growth rate that exceeded forecasts at 2.8%, propelled by strong consumer spending. This growth rate for the second quarter outpaced the anticipated 2.0% and marked an improvement from the first quarter’s 1.4% expansion. This positive economic data challenges the narrative of an imminent sharp downturn that would prompt aggressive rate cuts by the Federal Reserve (Fed). The report’s details are encouraging, with a key measure of domestic demand—final sales to private domestic purchasers—increasing by 2.6% for the second straight quarter, as highlighted by Fed Chair Powell. This suggests that the robust headline GDP figure is not concealing any significant economic frailties.
Inflation concerns were somewhat allayed by the core Personal Consumption Expenditures (PCE) index for June, which rose by 0.2% month-on-month, aligning with expectations. The year-on-year increase in the core index was a tad higher at 2.6%, due to revisions, yet the overall data portrays a stable economy without signs of excessive heat. Both real personal spending and personal income saw modest upticks, in line with forecasts, tempering the inflationary concerns sparked by the previous day’s strong GDP data. The latest figures lend support to the Fed’s measured approach to policy changes. The market’s anticipation of a rate cut in September is reflected in the approximately 70 basis points (bps) of easing priced in for the year.
This outlook has energised the fixed income market, as evidenced by the decline in 2-year Treasury yields to a level not seen since February, at 4.38%. The yield curve between 2-year and 10-year Treasuries has concurrently steepened. Bond markets are now pricing in ~70 bps of rate cuts by the end of the year. Despite a slight recovery spurred by the sanguine PCE data, the S&P 500 ended its second consecutive week in the red, with a 0.83% decline. This contrasted with the equal-weighted version of the S&P 500, which saw a 1.44% rise, indicating a shift from large-cap to small-cap stocks. The Magnificent Seven (Mag-7) group experienced a 3.95% drop, while the small-cap Russell 2000 Index gained 3.47%. Since the rotation commenced on 11 July, the Russell 2000 has notably outperformed the Mag-7, although its year-to-date performance is still relatively modest.
Contact us
0203 418 0257
info@onekc.co.uk
References
Source: https://www.brooksmacdonald.com/individuals/resources/insights/weekly-market-commentary-interest-small-cap-stocks-keeps-surging
Weekly Market Commentary: Interest in Small-Cap Stocks Keeps on Surging
In summary
– The market has seen a shift from momentum/growth stocks and large-cap tech companies to the Russell 2000 and cyclical/value stocks, with major firms like Alphabet and Tesla retreating after their earnings reports, contributing to the S&P 500’s largest single-day drop since December 2023.
– Economic data suggests a ‘soft landing’ with a stronger-than-expected Q2 GDP growth of 2.8%, driven by consumer spending and a stable core PCE index, challenging the narrative of a looming sharp downturn and supporting the Federal Reserve’s cautious policy stance.
– Fixed income markets have reacted with lower 2-year Treasury yields and a steepening yield curve, while ~70 bps of rate cut is now priced in until the end of the year.
Download this update as a PDF with accompanying data tables
The market has recently experienced a rotation in sentiment, with sectors such as the Russell 2000 and cyclical/value segments showing renewed vigour. This pivot has been at the expense of previously favoured momentum/growth stocks and the so-called ‘Magnificent Seven’ megacap technology companies. The initial batch of earnings reports from major players like Alphabet and Tesla fell short of investor expectations, intensifying existing worries about the lofty expectations for second-quarter earnings and the scrutiny over artificial intelligence investments, particularly in terms of capital expenditure versus their contribution to monetisation and productivity. This sentiment was reflected in the S&P 500’s most significant single-day retreat since December 2023, ending a remarkable 356-day run without a 2% or greater drop. Alphabet surpassed forecasts for revenue and earnings, largely due to its cloud and advertising businesses, yet its share price suffered post-earnings call, which alluded to potential cost-related headwinds. Meanwhile, Tesla’s shares also declined as the company reported lower-than-expected earnings for the fourth quarter in a row and delayed its Robotaxi event to October.
The narrative of a ‘soft landing’ for the economy is bolstered by the latest data, which includes a second-quarter Gross Domestic Product (GDP) growth rate that exceeded forecasts at 2.8%, propelled by strong consumer spending. This growth rate for the second quarter outpaced the anticipated 2.0% and marked an improvement from the first quarter’s 1.4% expansion. This positive economic data challenges the narrative of an imminent sharp downturn that would prompt aggressive rate cuts by the Federal Reserve (Fed). The report’s details are encouraging, with a key measure of domestic demand—final sales to private domestic purchasers—increasing by 2.6% for the second straight quarter, as highlighted by Fed Chair Powell. This suggests that the robust headline GDP figure is not concealing any significant economic frailties.
Inflation concerns were somewhat allayed by the core Personal Consumption Expenditures (PCE) index for June, which rose by 0.2% month-on-month, aligning with expectations. The year-on-year increase in the core index was a tad higher at 2.6%, due to revisions, yet the overall data portrays a stable economy without signs of excessive heat. Both real personal spending and personal income saw modest upticks, in line with forecasts, tempering the inflationary concerns sparked by the previous day’s strong GDP data. The latest figures lend support to the Fed’s measured approach to policy changes. The market’s anticipation of a rate cut in September is reflected in the approximately 70 basis points (bps) of easing priced in for the year.
This outlook has energised the fixed income market, as evidenced by the decline in 2-year Treasury yields to a level not seen since February, at 4.38%. The yield curve between 2-year and 10-year Treasuries has concurrently steepened. Bond markets are now pricing in ~70 bps of rate cuts by the end of the year. Despite a slight recovery spurred by the sanguine PCE data, the S&P 500 ended its second consecutive week in the red, with a 0.83% decline. This contrasted with the equal-weighted version of the S&P 500, which saw a 1.44% rise, indicating a shift from large-cap to small-cap stocks. The Magnificent Seven (Mag-7) group experienced a 3.95% drop, while the small-cap Russell 2000 Index gained 3.47%. Since the rotation commenced on 11 July, the Russell 2000 has notably outperformed the Mag-7, although its year-to-date performance is still relatively modest.
Contact us
0203 418 0257
info@onekc.co.uk
References
Source: https://www.brooksmacdonald.com/individuals/resources/insights/weekly-market-commentary-interest-small-cap-stocks-keeps-surging
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