Market Insights

Large growth stocks are leading the market to new highs again as investors anticipate lower interest rates.

The S&P 500 rose almost 2 percent in the holiday-shortened week between Friday, June 28, and Friday, July 5. The index closed above 5,500 for the first time and the Nasdaq-100 closed above 20,000 for the first time. Big growth names like Tesla (TSLA), Apple (AAPL) and Meta Platforms (META) helped drive the move. That offset weakness in the broader index, where 61 percent of members lost value. There was also a shift away from AI names like Nvidia (NVDA).

Important data points suggested the economy is slowing, with the potential to reduce inflation:

• Unemployment unexpectedly hit a 2-1/2 year high of 4.1 percent.
• Job growth in June beat estimates by 16,000, but April and May were revised lower by 111,000.
• Hiring focused on non-cyclical areas like health care, while economically sensitive areas like manufacturing and temping shrank.
• Initial jobless claims were slightly above estimates and continuing claims (a measure of ongoing joblessness) rose to the highest level since November 2021.
• The Institute for Supply Management’s service-sector report unexpectedly dropped to a four-year low. ISM’s manufacturing index also missed estimates. Both reports suggested price pressures are fading.
• ADP’s private-sector payrolls report revealed the smallest wage increases since August 2021.

Inflation “now shows signs of resuming its disinflationary trend,” Federal Reserve chair Jerome Powell said at a conference in Portugal. “We’ve made quite a bit of progress.” Minutes from the last central bank meeting added that “a variety of factors … were likely to help contribute to continued disinflation in the period ahead.”

The Atlanta Fed’s GDPNow estimate now sees growth of just 1.5 percent in the second quarter. It’s down from 4.2 percent in early May and 3.2 percent in mid-June.

Those events make a September 18 rate cut more likely, according to CME’s FedWatch tool. The market is also more optimistic about a second cut in December. The yield on two-year Treasury notes, which are more sensitive to Fed policy changes, additionally fell to their lowest level since the beginning of April.

Tesla and Technology

TSLA had its biggest weekly gain since January 2023 after quarterly deliveries beat estimates. Investors also focused on its potential as an AI stock with Elon Musk expected to unveil autonomous robotaxis on August 8. The rally made consumer-discretionary stocks the top-performing sector last week.

Technology was the No. 2 sector as chip makers bounced. Software companies, which fell sharply in April and May, also continued to rebound.

Communications stocks took third place as META, Alphabet (GOOGL) and Netflix (NFLX) jumped to new highs. Paramount (PARA) rallied after CNBC reported that a takeover might come soon.

Meanwhile, cyclical groups like energy and industrials fell. Some investors might think that conditions from 2020 and 2021 (before inflation surged) are returning.

Gold and silver miners were the other big gainers last week. They’re often viewed as potential beneficiaries of Fed rate cuts.

Charting the Market

Last week began with the S&P 500 consolidating above 5447. That was a high from June 12 where it had bounced several times. The index briefly tested that level on Monday morning and held. It rose slightly on Tuesday and accelerated higher the next two sessions.

The S&P 500 has now gone 454 days without a 3 percent pullback. That’s the longest streak in almost nine years without such a drop, according to TradeStation data. Such tight price action is potentially consistent with a lack of selling pressure and significant cash on the sidelines.

Some indicators behaved similarly to the period in November and December when the current rally began. For example, Wilder’s Relative Strength Index (RSI) remained at or near an overbought reading. The nine-day rate of change also stayed positive.

Next, the yield on the 10-year Treasury note returned below 4.32 percent. That was a potentially important level from June 2008.

At least two firms, Comerica Wealth Management and Carson Research, made bullish predictions based on the strong first half of the year.

Interestingly, a survey by the American Association of Individual Investors showed bullishness falling as the market advances. That may suggest that sentiment remains nervous and hasn’t yet reached a period of complacency.

The Week Ahead

This week has two major economic events and the start of earnings season.

The first item is tomorrow morning, when Powell of the Fed testifies before the Senate Banking Committee. Investors will closely monitor his comments for clues on monetary policy.

Crude-oil inventories are on Wednesday.

Thursday features the consumer price index (CPI) at 8:30 a.m. ET. As the first reading of inflation in June, it’s likely to have a big impact on interest rates and sentiment. Initial jobless claims are also due, along with quarterly results from PepsiCo (PEP) and Delta Airlines (DAL).

Friday brings producer prices, plus earnings from JPMorgan Chase (JPM), Citi (C) and Wells Fargo (WFC).