Market Outlook
Market leadership rotated last week, as the Russell 2000® had its second largest weekly outperformance over the S&P 500® since 2021. Investors now anticipate a 25-basis-point (bp) rate cut from the Federal Reserve (Fed) at its September meeting. While the yield curve remains inverted, it has steepened — coincidentally, by approximately 25 bps since late June — which provides a tailwind for smaller-capitalization equities, particularly those in the Financials sector, both of which have been challenged by the inverted yield curve for more than two years. An interest rate cut could expand equity valuations, but with robust economic data, the Fed could alternatively remain on pause beyond September.
For a sustained market re-acceleration, we think small-cap and value equity earnings revisions would need to turn positive, which hasn’t been the case so far. This week’s release of second-quarter GDP and June Personal Consumption Expenditures (PCE) data will provide markets with more insight into the health of the economy.
Table of the Week
The second-quarter blended earnings growth rate showed steady improvement throughout the week, propelled by strong earnings in Financials.
Large-cap bank reports exceeded estimates, driven by strong trading activity and a rebound in investment banking fees.
Earnings season continues this week, with over 140 companies reporting, including Tesla, Inc., and Alphabet, Inc. The results should highlight whether earnings growth reflects a broader market contribution or if it remains dominated by the “Magnificent 7.”
