Authors: Saqib Iqbal Ahmed and Lewis Krauskopf
NEW YORK (Reuters) – Signs of falling U.S. inflation and growing hopes of a rate cut from the Federal Reserve on Wednesday could be a positive sign for much of the stock market, which has been weak amid gains led by Big Tech stocks.
Good consumer price data fueled bets that the Federal Reserve will cut interest rates in coming months, pushing them to new highs. Stocks continued to rise after the Federal Reserve kept interest rates on hold and Fed Chairman Jerome Powell gave an encouraging assessment of the economy.
Some investors believe expectations of cooling inflation and easier monetary policy could boost areas of the market affected by rising interest rates, including small-cap and financial company stocks. That could ease concerns about the risk of a market rebound that is largely concentrated in a group of large technology stocks.
While the S&P 500 is up about 14% this year, about 60% of the returns have been driven by six companies whose stocks are overweighted in the index: Nvidia (NASDAQ: ), Microsoft (NASDAQ: ) , Apple (NASDAQ: ), Meta Platforms (NASDAQ: ), Alphabet (NASDAQ: ) and Amazon.com (NASDAQ: ), data from S&P Dow Jones Indices showed.
Angelo Kourkafas, senior investment strategist at Edwards, said that if Wednesday’s CPI report is the start of improving data that raises the possibility of a rate cut, “that could push the entire yield curve lower, leaving some areas sensitive to rising yields.” benefit”. Jones, including small caps and some economically sensitive stocks such as financial and industrial stocks.
Short-term interest rate futures currently price in a more than 70% chance of a rate cut in September, compared with forecasts earlier in the day that were only slightly better than a coin flip.
While technology and growth stocks have driven indexes higher in recent years, interest-rate-sensitive areas of the market tend to surge when hopes of easier monetary policy arise.
That’s what happened in the final months of last year, when small-cap stocks soared on expectations that the Fed was done cutting interest rates. The small-cap-focused stock gained 13.6% in the final quarter of 2023, while the S&P 500 gained 11.2%.
Luke Tilley, chief economist at Wilmington Trust, said: “The Fed doesn’t even need to cut rates in July as we expected, it just needs to move towards a rate cutting cycle, if you will, which should help. to expand performance.
“Our view is not only that there is room for expansion, but we fully expect that,” he said.
There were some signs of expansion Wednesday. The small-cap-heavy Russell 2000 rose around 2.2%, while the S&P 500 gained 1.1%, despite sharp gains in market leaders such as Apple and Nvidia. The index is down 0.1% this year.
Other areas that rebounded on Wednesday included the S&P 500 Bank Index, which rose 0.6%, although it remains in negative territory for the quarter. The index rose 0.9% on the day, while the S&P 500 real estate sector gained 1.1%; both groups are still down for the year.
The equal-weighted S&P 500 index, which represents the average stock in the index, rose 0.7%. It’s up just 4.5% this year.
To be sure, investors are holding out for some of this year’s winners, too. Technology stocks are the best-performing sector in the S&P 500 Index this year, rising 2.9% on the day, with Nvidia and Apple both rising more than 4%.
At the same time, investors may be cautious about cutting back on technology investments to move to other parts of the market. Last year, technology stocks outperformed the Russell 2,000 by about 24 percentage points. Looking further back, the performance gap is even wider: 50% within two years and 53% within five years, according to LSEG data.
