The Weekly Wrap: BayFort Capital Global Equity Research

Stock markets delivered mixed results this week with gains concentrated in the large-cap high-growth names.

• The Dow Jones Industrial Average (DJIA) fell by 0.54% while the Russell 2000, an index of small-cap stocks, fell by 1.01%.
• The S&P 500 gained 1.58% driven by Large-cap tech stocks while the rest of the index actually dipped slightly. This is evident from the underperformance of an equal-weighted version of the S&P 500, which declined 0.57%.
• The tech-heavy Nasdaq bucked the trend, continuing its upward climb this week with a gain of 3.47%, driven by strong earnings reports from AVGO & ADBE.
• European stocks also closed the week lower, with the STOXX Europe 600 Index dropping 2.39%, driven by unexpected wins of far-right parties in elections across the continent.

Enthusiasm for artificial intelligence continued to boost technology-related stocks and growth shares, which outperformed value stocks by the widest margin since March 2023 (461 basis points), according to Russell Indexes. AI beneficiaries AVGO and ABDE exceeded quarterly earnings expectations, driving momentum in the large-cap tech sector during an otherwise lackluster week for S&P 500 stocks.?

U.S. 10-year Treasury yields plummeted by 22 bps to 4.21% due to lower-than-expected inflation data, contributing to the outperformance of growth shares. On Wednesday, the Labor Department reported that headline consumer price index (CPI) inflation was flat in May for the first time in nearly two years. Core prices, excluding food and energy, rose 0.2%, slightly below expectations and reaching a seven-month low. Year-over-year, core inflation dropped to 3.4%, the lowest level since April 2021.?

Producer price index (PPI) inflation, reported Thursday, also surprised to the downside, defying expectations for a slight increase and falling 0.2%. Year-over-year, core PPI declined to 2.3%, ending five consecutive months of increases. Additionally, import prices fell 0.4% in May, their first decline in four months.?

The Federal Reserve surprised no one by holding interest rates steady. However, policymakers signaled a tougher stance on inflation. Their median projection for year-end borrowing costs jumped from 4.6% to 5.1%, indicating just a single rate cut by December. The Fed acknowledged some improvement in inflation compared to their previous "lack of progress" statement.?

BayFort Capital View: Inflation is easing meaningfully and the US Fed is willing to support the economy if required thereby providing support on the downside (if any) to the markets providing a safety net for the markets (known as the "Fed Put"). Futures markets point to a coordinated easing cycle across the OECD, with 29 out of 30 countries. This year is the year of Global Central Bank rate cuts, so we should see valuations improve as interest rates decline in line with rate cuts. This could pave the way for a new stock market upcycle driven by a double whammy: lower interest rates boosting valuations and robust earnings growth fuelled by a paradigm shift in computing and productivity powered by artificial intelligence (AI) in CY24-25. Our analysis indicates that the current market conditions provide an excellent opportunity to invest in global stocks, offering the potential for significant returns over the next 18-24 months.?

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