Benign US inflation could support stock market laggards (updated)
12/06/2024 20:42
(New throughout, updates prices and adds details on Fed
decision and market reaction and index performance)
By Saqib Iqbal Ahmed and Lewis Krauskopf
NEW YORK, June 12 (Reuters) - Signs of falling U.S.
inflation on Wednesday and growing hopes for interest rate cuts
from the Federal Reserve could be a positive signal for large
swathes of the stock market that have languished in a rally led
by Big Tech.
Benign consumer price data fueled bets the Fed will lower
rates in coming months and sent the S&P 500 .SPX to fresh
highs. Stocks held onto gains after the Federal Reserve left
interest rates unchanged and Fed Chairman Jerome Powell
delivered an encouraging assessment of the economy.
Some investors believe expectations of cooling inflation and
looser monetary policy could boost areas of the market that have
been hurt by higher rates, including shares of small caps and
financial companies. That could ease worries about the risks of
a market rally that has been concentrated in a cluster of giant
tech stocks.
Though the S&P 500 is up about 14% this year, about 60% of
the return has been driven by six companies whose shares have an
outsized weighting in the index: Nvidia NVDA.O , Microsoft
MSFT.O , Apple AAPL.O , Meta Platforms META.O , Alphabet
GOOGL.O , and Amazon.com AMZN.O , data from S&P Dow Jones
Indices showed.
If Wednesday's CPI report is the start of improved data that
raises chances of rate cuts, "that can bring the whole yield
curve lower, benefiting some of the areas that have been
sensitive to the upside in yields," said Angelo Kourkafas,
senior investment strategist at Edward Jones, including small
caps and some economically sensitive stocks such as financials
and industrials.
Short-term interest-rate futures are now pricing in more
than a 70% chance of a rate cut by September, up from only
slightly better than a coin toss earlier in the day.
While technology and growth stocks have powered stock
indexes higher in recent years, interest rate-sensitive areas of
the market have often surged when hopes of easier monetary
policy came to the fore.
One such episode came in the final months of last year, when
small caps soared on expectations the Fed was done cutting
rates. The small cap-focused Russell 2000 gained 13.6% in the
final quarter of 2023, compared to an 11.2% gain for the S&P
500.
"The Fed doesn't even need to cut in July as we expect, it
just needs to be heading towards that rate cut cycle, if you
will, and that should contribute to broadening performance,"
Luke Tilley, Chief Economist at Wilmington Trust.
"Our view is not just that there is room for broadening, but
that we fully expect that," he said.
Some broadening was in evidence on Wednesday. Though shares
of market leaders such as Apple and Nvidia surged, the small-cap
focused Russell 2000 .RUT was up around 2.2% against a 1.1%
rise in the S&P 500. The small-cap index was down 0.1% for the
year heading into Wednesday’s report.
Other areas bouncing back on Wednesday included the S&P 500
banks index .SPXBK , up 0.6%, although it remained in negative
territory for the quarter. The Dow Jones Transportation Average
.DJT was up 0.9% on the day, while the S&P 500 real estate
sector .SPLRCR gained 1.1%; both groups are still logging
declines on the year.
The equal weight S&P 500 .SPXEW - a proxy for the average
stock in the index - was up 0.7%. It has gained just 4.5% this
year.
To be sure, investors were sticking with some of this year's
winners too. Technology .SPLRCT , the best performing S&P 500
sector this year, was up 2.9% on the day, including gains of
more than 4% each for Nvidia and Apple.
At the same time, investors are likely to be cautious
when it comes to cutting exposure to tech in favor of other
areas of the market. The tech-heavy Nasdaq 100 .NDX has
outperformed the Russell 2000 by about 24 percentage points over
the last year. Looking back further, the performance gap is an
even wider: 50% over two years and 53% over five yers, according
to LSEG data.
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(Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Editing by
Ira Iosebashvili and David Gregorio)
((saqib.ahmed@thomsonreuters.com; @SaqibReports; +1 332 219
1971; Reuters Messaging:
saqib.ahmed.thomsonreuters.com@reuters.net))