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Economic data has also been surprisingly strong, even as interest rates remain at 23-year highs.
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CNN
—
There’s a clear shift in mood on Wall Street.
Strong corporate earnings have driven stocks to repeatedly hit record highs in 2024, even as persistent inflation has forced investors to lower their estimates for how many times the Fed will cut interest rates this year.
But with inflation readings slowing in recent weeks, Wall Street is betting the Federal Reserve will finally cut interest rates in September, and sees more options to profit from outside the big tech stocks that have dominated the market this year.
Data released Friday morning showed that the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose 1.2% to 1.7% in the first quarter. Slowing to 2.5% over 12 months That’s another sign to hopeful investors that inflation continues to ease from its highest level in four decades.
The Dow Jones Industrial Average rose 731 points, or 1.8%, on Friday. The S&P 500 rose 1.3% and the Nasdaq Composite rose 1.2%.
Economic data has also been surprisingly strong, even as interest rates are at a 23-year high. That, combined with slowing inflation, has raised hopes that central banks can rein in prices without causing a recession, something some economists say they have only been able to do once since the 1990s. Thursday’s data showed the economy expanded year-over-year. A robust annual rate of 2.8% The second quarter saw growth well above economists’ expectations.
Wall Street will get more clues about the Fed’s next move when it meets next week, where it is expected to keep interest rates on hold. The central bank is scheduled to cut rates just once this year, but Traders are betting on up to three, according to the CME FedWatch tool.
Brightening prospects for rate cuts are usually good news for stocks, because they tend to do well when rising borrowing rates aren’t straining corporate balance sheets. But you wouldn’t know that from this week’s stock market crash.
Markets were broadly higher on Friday, but the S&P 500 and Nasdaq were higher on Wednesday. Recorded worst performance every day Since 2022. Both indexes are expected to fall over the weekend, but the Dow is trending higher.
The selling pressure comes as investors sell off shares in the seven biggest technology companies that have dominated the market for the past two years, dragging down major indexes with their large weighting. As of June 28, technology companies made up 32% of total market capitalization, the highest level since the late 1990s, according to data from MRB Partners.
The group’s disappointing start to earnings season only exacerbated the decline in its shares. Electric car maker Tesla Inc.’s shares fell 12.3% on Wednesday after the company reported a more than 40% drop in profits overnight. Alphabet Inc.’s shares fell 5% after it beat profit expectations but YouTube advertising revenue fell short of analysts’ expectations.
One area that has benefited recently from the prospect of lower interest rates is small-cap stocks.
Smaller companies’ stocks tend to underperform when interest rates are high because they have more floating-rate debt than larger companies, but historically they tend to do better when the Fed starts to ease high-yield borrowing rates.
The Russell 2000 index, which tracks the performance of small-cap stocks, has risen 10% so far this month, outpacing the S&P 500’s 0.2% gain.
Investors are also betting on other parts of the market that stand to benefit from lower interest rates. Stephen Lee, founder of Logan Capital, said his firm added to its home-construction holdings earlier this quarter, believing that subdued inflation could allow the Fed to cut interest rates and ease an extremely tight housing market.
Ultra-high interest rates Homeowners are refraining from purchasing Even as demand for housing soars and home prices rise to record levels, a surge in people is seeing them sell their homes to take advantage of low pandemic-era mortgage rates.
Investors have worried over the past year that the market rally is hinged on a handful of tech stocks, raising the risk that stocks will fall if a few of them stumble.The Magnificent Seven drove about 60% of the S&P 500’s total return in the first half of this year, says Adam Turnquist, chief technical strategist at LPL Financial.
The recent rally in small-cap stocks has some investors hopeful the market rally will continue to extend.
There are signs that tech stocks’ woes may not be over yet: Their sharp declines after disappointing quarterly results from Alphabet and Tesla suggest investors are growing frustrated that companies are investing heavily in artificial intelligence with little to show for it in revenue growth.
Since OpenAI’s ChatGPT kicked off the AI arms race two years ago, many big tech companies have released AI chatbots and other flashy consumer tools, but the path to monetizing the technology remains unclear.
Speaking on Alphabet’s earnings call on Tuesday, UBS analyst Steven Ju noted that early use cases for the AI models that big tech companies have invested in building are “strongly around cost reduction and efficiency.”
“At what point do you think we’ll start thinking about products that can help Fortune 500 and Fortune 1000 companies generate revenue? Maybe something that can create significant value in the long term, not just reduce costs,” Ju said.
As the AI arms race continues to heat up, companies are unlikely to slow down their AI spending, but it’s unclear when these investments will have a positive impact on corporate balance sheets.
“For us, the risks of underinvesting are far greater than the risks of overinvesting,” Alphabet CEO Sundar Pichai said on a conference call.
This story is developing and will be updated.
