Wall Street’s key index, the S&P 500, continued its upward climb on Friday, marking its second consecutive week of market rally. This hot streak follows a strong performance trend, with the index rising in 10 out of the past 12 weeks.
Key Factors Driving the Market Rally
Two key factors fueled this week’s rally:
- Federal Reserve Chairman Jerome Powell’s Comments: Powell’s remarks before Congress suggested a potential shift towards lower interest rates, boosting investor confidence.
- June Consumer Price Index (CPI) Report: The report came in lower than expected, easing concerns about inflation and potentially paving the way for a more dovish Fed stance.
As a result, market participants significantly increased their bets on a rate cut in September,with the odds of a 25-basis-point reduction now approaching 90%.
Shift in Investor Focus
Interestingly, this week also saw a shift in investor focus. There was a move away from large technology companies (mega-cap stocks) towards more stable sectors, such as real estate and utilities (defensive and value sectors).
Weekly Market Performance Overview
Overall, the S&P 500 added nearly 1% for the week, while the tech-heavy Nasdaq saw a more modest gain of 0.2%. The Dow Jones Industrial Average, which is composed of blue-chip companies, performed the strongest with a rise of 1.6%.
Friday’s Closing Levels:
| Index | Close | Change | % Change |
| Dow Jones | 40,000.90 | +247.15 | +0.62% |
| S&P 500 | 5,615.35 | +30.81 | +0.55% |
| Nasdaq Composite | 18,398.45 | +115.04 | +0.63% |
| US 10-Year Yield | 4.183% | ||
| VIX | 12.46 | -0.46 | -3.56% |
Looking Ahead: Potential Fed Easing
There is little doubt that the Fed will ease in September,most likely by 25 basis points. It’s hard to see them lowering rates before September because they will probably want to see the next payroll number first.
Market Reaction Post-Rate Cut
The real question is how the market will react after the first cut.
A study by the Wells Fargo Investment Institute released last month found that the S&P 500 has fallen by an average of 20% in the 250 days following the first cut of a cycle. While this is a distinct possibility, signs of a recession would need to emerge for this to happen.
Corporate Earnings and Economic Direction
Upcoming corporate earnings may provide insights into the direction of the economy. Any weakness might see buying as recent reactions have shown, but if the weakness indicates a potential recession,caution is advised against putting too much money into stocks.
We have already seen some shift from tech into non-tech last week. While this could be temporary given the continued interest in AI, if the switch becomes more prominent, a deeper correction might be around the corner.
Despite these considerations, the current trend is still up, and sellers have paid a handsome price trying to fight it.
Source: CBOE, Bloomberg
This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable US bank exceeding 20 years.
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