Market Insights

Financial stocks have become the year’s top performing sector as rotation away from megacaps intensifies.

The group, which includes banks, insurers and securities firms, is now up 15 percent in 2024. It just pulled ahead of communications, which includes Nasdaq giants like Alphabet (GOOGL) and Meta Platforms (META), according to TradeStation data.

It’s the latest milestone in a process that started earlier in the month. At least two things seem to be happening. First, investors are embracing stocks that could benefit from lower interest rates. Second, they’re normalizing positions after historic concentration in a small number of giant companies like Nvidia (NVDA).

Other groups that are starting to lead include real-estate investment trusts, homebuilders and biotechnology. The Russell 2000 small cap index has also surged to life and now trails the Nasdaq-100 by just 1.5 percentage points on a year-to-date basis.

Last week provided more evidence of the shift. More than 300 members of the S&P 500 rose between Friday, July 19, and Friday, July 26. But the broader index still lost 0.8 percent of its value.

The reason was weakness in the megacaps. TradeStation data shows that only one of the 10 biggest companies by market capitalization went up last week. That single positive name was Berkshire Hathaway (BRK.B) — a financial stock.

Anything But Tech?

Some of the new gainers are apparent turnaround plays. That might also suggest investors are hunting for value instead of counting on big growth stories like AI.

Mohawk Industries (MHK), for example, had its biggest weekly advance since the pandemic after margin improvement pushed earnings and guidance past forecasts. The maker of flooring hasn’t made a new record high in almost seven years.

Next, 3M (MMM) is one of only two members of the Dow Jones Industrial Average to fall in the last decade. But last week it had its biggest gain in half a century. Margin improvement drove the profit beat as the industrial conglomerate settled litigation and raised prices.

Third was Bristol-Myers Squibb (BMY). The 137-year old drug maker lost half its value between late 2022 and June. But last week it had its biggest weekly gain since Gerald Ford was in the White House. Earnings surprised to the upside and management cited growth potential from a new portfolio of products including cancer treatment Opdivo.

GDP Beats

Economic data was potentially favorable for gains in the stock market.

Gross domestic product expanded by 2.8 percent between April and June, well above the 2 percent forecast. That could support corporate profits.

Inflation readings matched projections, bolstering expectations that the Federal Reserve will cut interest rates in September.

The labor market also showed signs of moderating without collapsing. Initial jobless claims were lower than expected and continuing claims eased. That may represent an end to the phase of weakening that began in May. Separately, personal income missed estimates and increased at its slowest pace since October. That may suggest wage pressures have eased.

There’s “a Goldilocks scenario at the start of the third quarter, with the economy growing at a robust pace while inflation moderates,” S&P Global Market Intelligence economist Chris Williamson said on Wednesday. “Output across manufacturing and services is expanding at the strongest rate for over two years.”

Charting the Market

While the S&P 500 has declined for two weeks, some chart watchers may see potential for a bounce.

First, the index tested and bounced at a bullish price gap from June 12 after the consumer price index (CPI) was unexpectedly unchanged. (That news spurred confidence that inflation was easing.)

It also held the 50-day moving average, suggesting the intermediate-term trend is still bullish.

Next, the stochastic slow oscillator has dipped to an oversold condition. The last time that happened, a rebound followed.

Price action on Thursday and Friday could have additional significance. The inverted hammer could signal its short-term drop was ending, and the inside day could reflect stabilization.

Lower U.S. Treasury yields could also be consistent with expectations of lower interest rates. Those could be especially important with the Fed meeting in two days.

The Week Ahead

This week is packed with important news — like the Fed on Wednesday — and earnings.

Today is the quietest session, with McDonald’s (MCD) and ON Semiconductor (ON) issuing results.

Tomorrow morning brings consumer confidence and earnings from companies like Pfizer (PFE), JetBlue (JBLU), PayPal (PYPL) and Procter & Gamble (PG). Microsoft (MSFT), Advanced Micro Devices (AMD) and Arista Networks (ANET) follow in the postmarket.

ADP’s private-sector payrolls report is on Wednesday morning. The Fed issues its monetary-policy statement at 2 p.m. ET, followed 30 minutes later by Chairman Jerome Powell’s press conference. Meta Platforms (META) reports after the closing bell.

Thursday features initial jobless claims, unit labor costs and the Institute for Supply Management’s manufacturing index. Apple (AAPL) and Amazon.com (AMZN) provide the big earnings.

Friday brings the Labor Department’s key monthly report, with non-farm payrolls, unemployment and wages. Chevron (CVX) and Exxon Mobil (XOM) issue quarterly numbers.