The US stock market has been on a tear in 2024, but cracks are starting to show. After a recent rally that went beyond the mega-cap tech stocks that have dominated the market for years, a broader retreat has taken hold, raising questions about the sustainability of the current upswing.
This volatility comes on the heels of a shift in investor sentiment. Investors dumped shares of the “Magnificent Seven” – a group of tech giants that includes Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL) – in favor of sectors more sensitive to interest rates. This rotation was fueled by signs of easing inflation, which led some to believe the Federal Reserve may start cutting rates as soon soon as September.
The data appears to support this. A recent report by Yardeni Research showed a “huge surge” in small-cap stocks following a cooler-than-expected inflation report in July. Liz Ann Sonders, chief investment strategist at Charles Schwab, believes that for the bull market to keep expanding, more economic data like this is needed to solidify investor confidence in a potential Fed pivot.
However, not everyone is convinced. Scott Wren, senior global market strategist at Wells Fargo Investment Institute, remains overweight large-cap stocks and views the rotation into small-cap as a temporary phenomenon. He believes the economic slowdown will be a “soft landing” and doesn’t see a need to shift into smaller equities just yet.
This coming week will be crucial, with key economic data releases scheduled. The Bureau of Economic Analysis will release its estimate of second-quarter GDP growth on July 25th, followed by the personal consumption expenditures price index, the Fed’s preferred gauge of inflation, on July 26th. How this data lands could significantly impact investor sentiment.
Adding to the uncertainty is the upcoming US presidential election. With President Biden announcing he will not seek re-election and endorsing Vice President Kamala Harris as his replacement, investors are left to consider how the policies of the eventual winner might impact stock and bond valuations.
Despite the recent market jitters, the S&P 500 remains up over 15% for the year, though it is down slightly from its record high in July. Historically, such a strong run is often followed by a correction, and some analysts believe a 10% pullback is overdue. The S&P 500 hasn’t seen a significant decline since October 2023.
While the tech-heavy Nasdaq and the S&P 500 faltered last week, the Dow Jones Industrial Average managed to notch its third consecutive week of gains. Additionally, the Russell 2000, which tracks small-cap stocks, saw a modest increase. This suggests that investors are taking a cautious approach and potentially looking to diversify their holdings.
Overall, the US stock market finds itself at a crossroads. The recent retreat from Big Tech and the upcoming economic data releases will be critical in determining whether the current rally has legs or if a broader correction is on the horizon.
