Stocks Rise as Fed Bets Rekindle Range Trade: Markets Wrap

(Bloomberg) — The stock market gained momentum at the end of a choppy week after key economic data reinforced speculation that the Federal Reserve will set the stage for an interest-rate cut in September.

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Every major S&P 500 group rose Friday on bets that a Fed easing cycle will continue to fuel Corporate America — with the bull market expanding beyond a narrow group of companies. While Big Tech has enjoyed massive gains this year, so-called concentration risk has come to the fore after a disappointing start to earnings season for megacaps.

The rotation into economically sensitive stocks was fueled by Fed-friendly data. Investors who for months saw fewer alternatives to a narrow group of market winners suddenly faced more choices. Financial, industrial and staples stocks broadly outperformed technology stocks in July. Small caps rose 10% on bets they would fare better amid lower rates, given their higher debt loads.

“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 widening and recovering, you’ll see increased enthusiasm for these small cap names. There’s going to be staying power in this rotation.”

Economic data on Friday reinforced those bets. The Fed’s preferred measure of underlying U.S. inflation — the personal consumption expenditures price index — rose at a moderate pace in June and spending remained healthy. U.S. consumer sentiment eased in July to an eight-month low.

“The prospect of interest rate cuts has helped underpin the bullish move for smaller names,” said Quincy Krosby of LPL Financial. “Still, there has been a prevailing concern that because small caps require a solid economic backdrop, a weaker U.S. economy could easily dent investor interest.”

The S&P 500 rose 1.1%. The Dow Jones Industrial Average rose 1.6%. The Nasdaq 100 added 1%. The small-cap Russell 2000 rose 1.7%. Home builders hit a record. 3M Co., the iconic maker of Post-it Notes, rose the most since 1980 on an upbeat outlook. An initial public offering for Bill Ackman’s U.S. closed-end fund was postponed.

Yields on 10-year Treasury notes fell five basis points to 4.19%.

A weighted version of the S&P 500 — which gives Target Corp. as much clout as Microsoft Corp. — outperformed the U.S. stock index for the third straight week.

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That’s a notable shift from the measure that has tracked the S&P 500 for months. And it comes as optimism about possible monetary easing pushes investors away from the perceived safety of tech megacaps.

“A significant rotation from large-cap growth to SMID value is underway, and we think it will continue,” said Piper Sandler’s Craig Johnson. “Our breadth indicators have confirmed this seismic shift, along with technical evidence that investors are reducing their concentration risk in the ‘Lag’ Seven and other large-cap leaders.”

The Fed will likely 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 quarterly reductions through 2025. Nearly three-quarters of those surveyed say the U.S. central bank will use the meeting to set the stage for a quarter-point cut at its next meeting in September.

“It looks like the tide has finally turned,” David Russell said on TradeStation, in comments addressing the latest inflation data. “Investors can now focus on next week’s big earnings and worry less about prices and rates.”

“Next week’s earnings reports from a large group of mega-cap technology names will be a crucial test for a market that is trying to find direction amid mixed economic data and underpinned by a historically negative seasonal pattern,” said LPL Financial’s Krosby.

Indeed, traders will be watching for a series of profits coming from big tech companies.

The stakes were already high 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 set to report earnings next week.

“The ‘earnings question’ will likely still be top of mind as we head into August,” said Matt Maley of Miller Tabak + Co. “If this earnings season continues to weigh on tech stocks, there’s a good chance it will cause investors to start ‘rotating’ into cash — away from small-cap stocks.”

The rally in the biggest U.S. technology stocks risks weakening further if the U.S. economy continues to cool, according to Michael Hartnett of Bank of America Corp.

The strategist — who is bullish on bonds for the second half of 2024 — said signs of an economic slowdown would drive a rotation into stocks that have lagged expensive tech megacaps this year.

Hartnett said recent data suggests the global economy is “sick” and that “we are one bad payroll away” from big tech stocks losing their dominance.

Now, here’s some advice from Strategas: Fear the cut, not the pause — for the markets and for the profits.

The market tends to perform much better during the period between the last hike in a Fed tightening cycle and the first rate cut than it does after the first cut in the Fed funds rate, according to Jason De Sena Trennert and Ryan Grabinski of Strategas.

On average, the market bottoms 213 days later and 23% lower after the Fed’s first rate cut in a series of rate cuts. Operating profits for the S&P 500 decline by about 10% on average in the 12 months following the first easing, according to Strategas.

Corporate Highlights:

• Honeywell International Inc. is considering an initial public offering of its majority-owned quantum computing company, Quantinuum, as early as next year, according to people familiar with the matter.

• McDonald’s Corp.’s new $5 meal deal has led to a modest increase in U.S. visits and brought back some lower-income customers — early signs that the burger chain’s strategy of appearing more affordable is paying off.

• Apollo Global Management Inc. has agreed to buy International Game Technology Plc’s gaming division and gambling machine company Everi Holdings Inc. in a $6.3 billion, all-cash deal that will result in the two businesses merging.

• Apple Inc. lost ground in China’s smartphone market in the June quarter as local companies such as Huawei Technologies Co. surged ahead.

• Dexcom Inc. plunged after the maker of blood sugar monitoring devices for diabetics unexpectedly cut its 2024 sales forecast, catching Wall Street by surprise.

Some of the main movements in the markets:

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• The S&P 500 was up 1.1% as of 4 p.m. ET.

• The Nasdaq 100 rose 1%

• The Dow Jones Industrial Average rose 1.6%

• MSCI World Index rose 0.9%

• Bloomberg Magnificent 7 Total Return Index up 0.9%

• The Russell 2000 index rose 1.7%

Coins

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.1% to $1.0857

• The British pound rose 0.2% to $1.2873

• The Japanese yen rose 0.1% to 153.78 per dollar

Cryptocurrencies

• Bitcoin rose 4% to $67,913.38

• Ether rose 3.6% to $3,267.93

Titles

• The yield on the 10-year Treasury note fell five basis points to 4.19%

• The yield on German 10-year bonds fell one basis point to 2.41%

• The yield on 10-year UK bonds fell three basis points to 4.10%

Products

• West Texas Intermediate crude fell 1.9% to $76.80 a barrel

• Spot gold rose 0.9% to $2,386.90 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Janet Freund, Jessica Menton, Sagarika Jaisinghani, Steve Matthews, Dana Morgan, Alex Nicholson, Chiranjivi Chakraborty and Richard Henderson.

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