The stock market is changing quickly as investors anticipate potential rate cuts and a second Trump Administration.
TradeStation data shows a dramatic shift away from large growth stocks in favor of smaller companies and value plays. Banks, financials, small caps, biotechnology and industrials have been some of the main beneficiaries so far. Technology and communications have performed the worst. Those two sectors include most of the trillion-dollar giants like Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL) and Meta Platforms (META).
At least three things seem to be going on.
Inflation, Investment Banking
First, last week’s unexpected drop in the consumer price index (CPI) made investors confident the Federal Reserve will cut interest rates on September 18. Chairman Jerome Powell added to those hopes Monday by saying rate cuts could start before inflation drops all the way to 2 percent.
Second, financials are having a strong earnings season. Increased investment banking, wealth management and improved lending have been cited as catalysts so far.
“Our investment banking backlog is up significantly this quarter,” Goldman Sachs (GS) CEO David Solomon said on Monday. “From what we’re seeing, we are in the early innings of the capital markets and M&A recovery.”
Kelly King, former CEO of Truist (TFC), separately told CNBC that “we may be at the trough with regard to net interest margin, and that’s really good for all banks.” He added that the trend could last “several quarters, maybe two or three years.”
Trump vs Tech?
Third is the widening belief that former President Donald Trump will win reelection on November 5. For example, The Hill reported yesterday that a new survey by The Times/SAY24 found Trump leading in key swing states like Pennsylvania.
Another Trump Administration could potentially ease regulation. That may allow more merger and acquisition activity and boost domestic energy production. More M&A could help small caps, while more oil production could help lower fuel prices and inflation. There are also hopes of support for domestic manufacturing.
| Index | 4-day | Previous month |
| Banks | +11% | +4.7% |
| Russell 2000 | +10% | +0.9% |
| Biotechnology | +6.7% | +4.5% |
| Industrials | +5.1% | -0.3% |
| Financials | +3.8% | +1% |
| S&P 500 | +0.6% | +5.4% |
| Communications | -1.1% | +4% |
| Nasdaq-100 | -1.3% | +8.8% |
| Semiconductors | -1.7% | +12% |
| Technology | -1.8% | +10% |
The market has shifted as these perceptions spread. The table on the right uses TradeStation’s RadarScreen™ tool to compare price moves of select indexes over different time frames. The four-day change covers the period since last week’s inflation report. The right column shows performance over the preceding 21 sessions (which matches a month).
Notice how groups associated with “megacap growth” led in the previous period but have lagged more recently. This highlights the apparent shift in leadership.
In another comparison, TradeStation data shows the price ratio between the Russell 2000 and the Philadelphia Semiconductor Index hitting an all-time low one month ago. Some investors may see potential for a longer-term reversion.
In conclusion, sentiment focused heavily on large growth companies as recently as July 4 week. However price action took a dramatic turn in the first full week of the year’s second half. Hopefully this article explains some of the changes in case the new trends continue.
