(Bloomberg) — Wall Street’s rotation into riskier corners of the stock market got another boost Friday after key economic data bolstered speculation the Federal Reserve will set up the stage next week for a rate cut in September.
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Every major group in the S&P 500 rose on bets that the start of the Fed easing cycle will keep fueling the outlook for Corporate America. Those wagers continued to drive traders into lagging areas of the bull market on hopes the rally will broaden out. Once again, smaller firms largely beat the cohort of tech megacaps — extending their July surge to about 10%.
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The rotation into economically sensitive shares that suddenly took hold this month came on the heels of Fed-friendly data. Small caps are typically more sensitive to higher interest rates, given their higher debt loads and weaker earnings. They do better when borrowing costs fall and the economic outlook improves.
“We’ve seen this strength in small caps — a significant rotation not seen in decades,” said George Maris at Principal Asset Management. “As we see earnings likely broaden out and recover, you’re going to see greater enthusiasm for those smaller cap names. There is going to be lasting power to this rotation.”
Friday’s economic data only reinforced those bets. The Fed’s preferred measure of underlying US inflation — the so-called core personal consumption expenditures price index — rose at a tame pace in June and consumer spending remained healthy. Separately, US consumer sentiment eased in July to an eight-month low.
“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%. The Russell 2000 of small caps climbed 1.1%. A Bloomberg gauge of the “Magnificent Seven” megacaps added 0.7%. Homebuilders hit a record high. 3M Co., the iconic maker of Post-it notes, and drugmaker Bristol Myers Squibb Co. jumped on bullish outlooks. Treasury 10-year yields dropped three basis points to 4.21%.
The rotation from big tech comes after a massive rally that drove the S&P 500 to almost 40 record highs this year alone. Investors who for months saw few alternatives to the narrow band of stock-market winners were suddenly faced with choices 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 the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — is beating the US equity benchmark for a third straight week. This is a notable shift for the measure that’s trailed the US equity benchmark for months. And it comes as optimism over eventual monetary easing is pushing investors away from the perceived safety of tech megacaps.
The Fed is likely to signal next week its plans to cut interest rates in September, according to economists surveyed by Bloomberg News, a move they say will kick off reductions each quarter through 2025. Nearly three-quarters of respondents say the US central bank will use the gathering to set the stage for a quarter-point cut at the following meeting in September.
“It seems the tide has finally turned,” said David Russell at TradeStation, in comments addressing the latest inflation data. “Investors can now focus on the big earnings next week and worry less about prices and rates.”
Indeed, traders will be on the lookout for a raft of earnings from big tech.
The stakes were already elevated for the group heading into this earnings season. They just got a lot higher after a rout fueled by this week’s underwhelming results from a pair of megacaps. Apple Inc., Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. are all due to report earnings next week.
“The ‘earnings issue’ will probably still be the more important one as we move into the month of August,” said Matt Maley at Miller Tabak + Co. “If this earnings season continues to weigh on the tech stocks, there is a good chance that it will cause investors to start to ‘rotate’ into cash — instead of the small cap stocks.”
The rally in the biggest US technology stocks is at risk of fading further if the US economy continues to cool, according to Bank of America Corp.’s Michael Hartnett.
The strategist — who is bullish on bonds for the second half of 2024 — has said signs of an economic slowdown would fuel a rotation into stocks that have lagged behind the pricey tech mega-caps this year.
In a note on Friday, Hartnett said 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:
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McDonald’s Corp.’s new $5 meal deal has led to a modest increase in US visits and brought back some low-income diners — the first signs that the burger chain’s strategy to appear more affordable is paying off.
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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 see the two businesses merged.
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Apple Inc. lost ground in China’s smartphone market in the June quarter after local companies like Huawei Technologies Co. surged ahead.
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Dexcom Inc. plunged after the maker of blood sugar monitoring devices for diabetics unexpectedly slashed its 2024 sales guidance, catching Wall Street by surprise.
Some of the main moves in markets:
Stocks
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The S&P 500 rose 1.1% as of 11:54 a.m. New York time
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The Nasdaq 100 rose 1%
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The Dow Jones Industrial Average rose 1.7%
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The Stoxx Europe 600 rose 0.8%
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The MSCI World Index rose 1%
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Bloomberg Magnificent 7 Total Return Index rose 0.7%
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The Russell 2000 Index rose 1.1%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro rose 0.1% to $1.0859
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The British pound was little changed at $1.2862
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The Japanese yen rose 0.1% to 153.78 per dollar
Cryptocurrencies
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Bitcoin rose 3.4% to $67,516.88
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Ether rose 3.1% to $3,252.42
Bonds
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The yield on 10-year Treasuries declined three basis points to 4.21%
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Germany’s 10-year yield declined one basis point to 2.41%
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Britain’s 10-year yield declined three basis points to 4.10%
Commodities
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West Texas Intermediate crude fell 1.9% to $76.83 a barrel
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Spot gold rose 0.9% to $2,385.17 an ounce
This story was produced with the assistance of Bloomberg Automation.
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