July Turned the Stock Market Upside Down. Will It Stay That Way?

July was nan period nan banal marketplace was turned connected its head. The tech stocks that powered marketplace gains successful nan first six months of nan twelvemonth stumbled while small-caps, which had conscionable hardly recovered from 2022’s carnivore marketplace astatine nan commencement of nan month, surged. 

In a astonishing inversion of nan first half of nan year, only 2 of nan S&P 500’s eleven sectors posted declines successful July: Communication Services (-4.2%) and Information Technology (-2.1%). The marketplace was led by Real Estate (+7.1%), 1 of nan worst-performing sectors complete nan past 12 months, and Financials (+6.3%). 

Rate-sensitive stocks sewage a boost connected July 11 erstwhile information showed user prices unexpectedly declined successful June, raising condemnation connected Wall Street that nan Federal Reserve will statesman cutting liking rates arsenic early arsenic September. Investors piled into small-caps, which are much apt to transportation floating-rate debt than their mega-cap counterparts. In nan 5 days pursuing that ostentation report, nan small-cap Russell 2000 roseate 11.5%, its biggest rally since nan Covid turmoil of 2020.

Simultaneously, investors sold disconnected cash-rich large tech companies, nan marketplace values of which stood astatine historical highs aft much than a twelvemonth and a half of marketplace leadership. The Magnificent Seven fell 2.7% while nan Russell surged, creating a 14.2 percent constituent spread betwixt nan capacity of nan 2 groups, nan largest divergence successful information going backmost to 2015. 

Expectations for complaint cuts besides buoyed nan industries that person been deed hardest by nan Fed’s run of complaint hikes. An scale of location banks, which person been hammered by higher liking rates, surged 18.5% successful July. Homebuilder stocks gained 17.6% arsenic investors stake little rates would reinvigorate nan dormant U.S. lodging market. 

What To Expect successful August

One large mobility hanging complete markets is whether nan rotation retired of tech and into small-caps will continue.

Some method analysts spot signs it will. Bank of America's Stephen Suttmeier precocious noted that nan Russell 2000’s rally coincided pinch a surge successful nan number of small-cap stocks hitting 52-week highs, confirmation of what he called a "big guidelines breakout." He besides pointed to expanding trading measurement and an summation successful nan number of stocks trading supra their 200-day moving averages arsenic much logic to beryllium bullish connected small-caps going forward.

The macroeconomic stars could besides beryllium aligning for mini caps.

“The latest information releases, including a affirmative second-quarter GDP print, and moreover nan durable equipment study pinch a anemic header number, but pinch affirmative information connected superior expenditures, propose that while nan system has been cooling it isn’t connected nan precipice of collapsing,” said Quincy Krosby, Chief Global Strategist astatine LPL Financial, successful a caller commentary. 

A study earlier this week suggesting nan U.S. occupation marketplace continued to cool successful June added to condemnation nan system remains solid, but not truthful beardown arsenic to deter nan Fed from cutting liking rates this year. That balance—healthy but not overheated—should proceed to support nan rotation into mini caps, Krosby said.

To beryllium sure, chasing nan rally comes pinch risks. Small caps, Krosby warns, are “known to waste disconnected quickly erstwhile they comprehend a worldly alteration successful direction.” And markets are rife pinch economical and governmental uncertainty astatine nan moment.