Sarah Travers
In a significant market movement, stocks have reached new all-time highs as recent economic data indicates the economy’s resilience amid receding inflation and the Federal Reserve’s approach to initiating rate cuts. This surge comes as smaller firms rally, with the Russell 2000 poised for its biggest five-day run since April 2020. Meanwhile, the megacap sector, which has largely driven the bull market, faced pressure, led by losses in Nvidia Corp., a key player in the artificial intelligence sector.
Market dynamics reflected mixed responses to financial earnings. Morgan Stanley saw a decline as results from its key wealth business fell short of estimates. In contrast, Bank of America Corp. reported a rise after projecting that net interest income would increase by the end of the year. The S&P 500 hovered near 5,655, the Dow Jones Industrial Average climbed by 1.5%, and the Russell 2000 gained 2%. The Nasdaq 100 remained relatively unchanged. Amazon.com Inc. outperformed, buoyed by its Prime Day event, while UnitedHealth Group Inc. experienced a rise due to strong results. Conversely, Charles Schwab Corp. fell as new brokerage accounts missed estimates.
The equity market’s resilience is underpinned by optimism that the economy has withstood the worst of the Federal Reserve’s tightening measures. A recent retail sales report was particularly encouraging, as it suggested that the economy is stabilizing. The preference is for the Federal Reserve to cut rates in response to falling inflation rather than rushing to support a weakened economy.
Small-cap stocks, although not the top preference, are historically cheap on a relative basis and could rebound quickly if interest rates fall and economic growth remains robust. The Russell 2000’s impressive performance highlights this potential, with a notable 2% increase.
In the broader market, Treasury 10-year yields fell by three basis points to 4.20%. Gold prices hit a record high, driven by expectations that the Federal Reserve will soon pivot on its interest rate policy.
June’s retail sales data defied expectations of an economic slowdown, reinforcing the argument that Federal Reserve officials do not need to worry about a sluggish economy just yet. Retail sales, excluding the impact of a cyberattack on auto dealerships, rose in June by the most in three months, indicating that consumers regained their footing at the end of the second quarter. Overall, total retail sales remained unchanged, restrained by a 2% decline in receipts at auto dealers.
Despite these positive indicators, the expectation remains that the Federal Reserve will cut rates at its September meeting unless upcoming inflation-related data suggests a rise in prices. Federal Reserve Chair Jerome Powell noted that second-quarter economic data has increased policymakers’ confidence that inflation is on a path toward the central bank’s 2% target, potentially paving the way for near-term interest rate cuts.
In corporate highlights, several key developments have emerged. Goldman Sachs Group Inc. and Wells Fargo & Co. are joining JPMorgan Chase & Co. in tapping the US investment-grade bond market following their second-quarter earnings reports. PNC Financial Services Group Inc. reported its first increase in net interest income since the end of 2022, setting the stage for a projected record year of net interest income growth in 2025. Microsoft Corp.’s investment in Inflection AI is facing a full UK antitrust probe due to concerns over the hiring of former employees from the artificial intelligence startup. Philip Morris International Inc. is expanding production of Zyn in the US to meet soaring demand for the popular oral nicotine pouch. Additionally, Starboard Value has become the third activist investor this year to take a stake in Match Group Inc., the owner of Tinder, as the company’s paying customer base has shrunk for six consecutive quarters.
Looking ahead, several key events are anticipated this week, including the Eurozone CPI, US housing starts and industrial production, the Fed Beige Book, and the ECB rate decision. Other significant reports include US initial jobless claims, the Philadelphia Fed manufacturing index, and the Conference Board LEI. Various Federal Reserve officials are also scheduled to speak, providing further insights into the economic outlook.
Overall, the market movements have been marked by significant gains and strategic shifts as investors navigate the evolving economic landscape and anticipate the Federal Reserve’s next steps.
