The June CPI report, which showed consumer inflation cooling at a faster than anticipated rate ushered in one of the swiftest market rotations we’ve seen in some time. If you looked at just the S&P 500 and Nasdaq 100, you’d think the market reacted negatively, but the fact that the equal weight S&P 500 was up more than 1%, utilities were up nearly 2% and small-caps were up more than 3.5% indicates that this was a broadly positive day, just not the one many were probably hoping for.
Market watchers will interpret this move in different ways, but I think the fact that rate cuts typically precede an economic downturn and a stock market correction, while Powell’s rhetoric is making a modest pivot away from inflation concerns to growth concerns, suggests investors may be nearing the end of paying premium valuations for stocks. Does that mean the end for tech and the magnificent 7? Too early to tell, but Thursday’s action gives the strong impression that investors are now considering more reasonably valued companies. That would be a good sign for value, small-caps and certain cheap sectors, including healthcare and financials (which has gotten off to a pretty good start to the Q2 earnings season). If this ends up being the start of a market pivot away from tech, growth and mega-caps after several quarters of uninterrupted outperformance, we could be incredibly early in a new multi-year cycle for small-caps. Another segment to watch for is international stocks, which are also incredibly cheap and due for a run of their own.
