2024 Week 30

Market Rotation: Small-Caps Lead the Charge

For the second week, U.S. small-cap stocks have outperformed their large-cap counterparts by a wide margin. The small-cap benchmark posted a notable total return of 1.7%, while the large-cap index fell by 1.8%. The Russell 2000 Index, a key gauge of small-cap performance, surged by an impressive 7.7% over the past two weeks. This surge is a clear indicator of a market rotation towards segments that investors believe will benefit the most from potential interest-rate cuts.

Momentum Shift: Tech Stocks Tumble

The NASDAQ, which had been on a six-week winning streak, fell nearly 4% this week. This decline was primarily driven by continued weakness in several mega-cap technology stocks. In contrast, the S&P 500 experienced a smaller decline of around 2%. Interestingly, the Dow Jones Industrial Average emerged as an outlier, posting a gain of nearly 1%. This divergence underscores the varied performance across different market segments.

Style Reversal: Value Takes the Lead

U.S. large-cap value stocks have outpaced their growth counterparts for the second consecutive week. This shift is chipping away at the growth style’s year-to-date performance leadership. Over the past two weeks, a value benchmark has risen by a total of 3.5%, while its growth counterpart has declined by 4.3%. This reversal signals a shift in market sentiment, with investors favoring value stocks amidst broader market volatility.

Earnings Gain: Expectations on the Rise

The second week of the quarterly earnings season has brought positive news, with an expectation uptick. Based on initial results and forecasts for upcoming reports, analysts now expect S&P 500 companies to post an average second-quarter earnings increase of 9.7% compared to the same quarter a year earlier. This is an increase from the projected growth rate of 9.1% just a week earlier, indicating growing confidence in corporate earnings.

Bumpier Ride: Volatility on the Rise

The past week has seen a notable increase in market volatility. An index that tracks investors’ expectations for short-term U.S. stock market volatility, the Cboe Volatility Index (VIX), climbed 32% for the week, reaching its highest level since April 22. This rise in volatility reflects the choppy trading conditions and heightened uncertainty in the market.

Mixed Signals: Retail Sales and Unemployment

Economic indicators have presented a mixed picture. U.S. retail sales remained unchanged in June relative to the previous month, beating the consensus forecast of a 0.4% decline. However, the latest weekly count of initial unemployment claims rose to 243,000, matching a recent high from last month and marking the highest since August 2023.

Europe Holds Steady: ECB’s Decision

Across the Atlantic, the European Central Bank (ECB) kept its key interest rate unchanged, opting for a holding pattern after ordering an initial rate cut last month. This decision highlights a growing policy gap with the U.S. Federal Reserve, which has yet to reduce its key lending rate from its currently high level.

U.S. GDP Ahead: Growth Projections

The U.S. government’s initial estimate of second-quarter GDP, scheduled for release on Thursday, is expected to show that the economy accelerated relative to the first quarter. According to U.S. Federal Reserve economists, the first quarter saw GDP growth at a 1.4% annual rate, while projections for the second quarter estimate a growth rate of 2.7%.

Summary

Significant market shifts and mixed economic signals have marked the past week. The outperformance of small-cap stocks and a rotation towards value over growth suggest changing investor preferences amidst potential interest-rate cuts. Increased market volatility and mixed economic indicators add complexity to the financial landscape. Staying informed and adaptable remains crucial for navigating these evolving market conditions.