By Saqib Iqbal Ahmed and Lewis Krauskopf
NEW YORK (Reuters) – Signs of falling U.S. inflation on Wednesday and growing hopes of Federal Reserve rate cuts could be a positive sign for large parts of the stock market that have languished in a rally led by Big Tech.
Favorable consumer price data fueled bets that the Fed will cut rates in coming months and sent the S&P 500 to new highs as investors waited for comments from Fed Chairman Jerome Powell at the end of the central bank meeting.
Some investors believe expectations of a cooling in inflation and looser monetary policy could also boost parts of the market hit by higher interest rates, including small caps and financial companies. That could allay concerns about the risks of a market rally concentrated in a cluster of giant tech stocks.
Short-term interest rate futures are now pricing in a more than 70% chance of a rate cut in September, compared to only slightly better than the toss earlier in the day.
While the S&P 500 is up about 14% this year, about 60% of the return is due to six companies whose shares are outsized in the index: Nvidia, Microsoft, Apple, Meta Platforms, Alphabet and Amazon.com. This is evident from figures from the S&P Dow Jones Indices.
If Wednesday’s CPI report is the start of improved data that increases the chances of rate cuts, “that could lower the entire yield curve, benefiting some areas that have been sensitive to the rise in rates,” Angelo says Kourkafas, senior investment strategist at Edward. Jones, including small caps and some economically sensitive stocks such as financials and industrials.
While technology and growth stocks have driven stock indexes higher in recent years, interest rate-sensitive parts of the market have often been on the rise as hopes for looser monetary policy have come to the fore.
One such episode occurred in the final months of last year, when small caps soared on expectations that the Fed was done cutting rates. The small-cap-focused Russell 2000 rose 13.6% in the final quarter of 2023, compared with an 11.2% gain for the S&P 500.
“The Fed doesn’t even need to cut spending in July as we expect, it just needs to move into that rate-cutting cycle, if you will, and that should feed into broader performance,” said Luke Tilley, chief economist at Wilmington Trust.
“Our view is not only that there is room for expansion, but that we fully expect it,” he said.
There was some broadening on Wednesday. While shares of industry leaders like Apple and Nvidia rose sharply, the small-cap-focused Russell 2000 rose about 2.6%, compared with a 1.1% gain in the S&P 500. The small-cap index fell this year by 0.1% ahead of Wednesday’s report.
Other areas that rebounded on Wednesday included the S&P 500 bank index, which rose 1.1%, although it remained negative throughout the quarter. The Dow Jones Transportation Average rose 0.9% on the day, while the real estate sector in the S&P 500 rose 1.7%; both groups continue to record declines throughout the year.
The equal weight of the S&P 500 – a measure of the average stock in the index – rose 0.9%. This year the price has risen only 4.7%.
To be sure, investors stuck with some of this year’s winners, too. Technology, the best-performing S&P 500 sector this year, rose 2.9% on the day, including gains of more than 4% each for Nvidia and Apple.
(Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)
