Broadening Market Rally: Small Caps Join Tech Giants Amid Fed Rate Cut Forecast
The once dwindling ranks of the US stock market’s elite performers, popularly known as the Magnificent Seven, are seeing some much-needed reinforcements. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite indexes set new record highs on Wednesday and Thursday following the Federal Reserve’s reaffirmed projection of three quarter-point rate cuts in 2024. These developments provided much-needed relief to investors who had been anxious about potential changes to the central bank’s rate cut expectations in light of recent hot inflation data.
However, it’s not just technology giants that are paving the way for higher stock prices. The S&P 600 index, which represents small-cap American stocks, turned positive for the year as of late. This development is particularly encouraging for Wall Street because small companies generate most of their revenue from domestic customers, making them reliable indicators of the US economy’s health. Furthermore, smaller companies often operate in sectors like financials and industrials, which are known to follow broader economic trends.
Ryan Detrick, chief market strategist at Carson Group, shared his perspective on the significance of small-cap industrials leading the charge: “When you see small-cap industrials leading, that’s usually a sign that the market is saying things are on pretty firm footing here.”
This broader rally extends beyond just the tech giants, offering a welcome sign for investors. A more extensive rally makes the market less reliant on just a handful of names, making it more resilient against potential pullbacks.
The market’s recovery has already begun to broaden in recent weeks, even before the Federal Reserve-induced optimism. Some investors attribute this to renewed hopes for a soft landing—a scenario where the Fed manages to bring inflation down to its 2% target without triggering a recession. With over 93% of S&P 500 companies having reported their fourth-quarter earnings and 78% beating expectations, corporate profits have contributed to the optimistic outlook.
The labor market remains resilient despite interest rates lingering at their highest levels in 23 years, with jobs data continuing to show strength. This resilience has fueled the continued rise of stocks following last year’s powerful rally, despite some notable declines in shares like Tesla, Apple, and Alphabet.
Despite this optimistic outlook, a potential 5% to 7% correction would not be cause for concern, according to Detrick: “Just enough to shake out those johnny-come-lately weak hands … because [the rally is] almost too easy.”
However, some investors caution against Wall Street getting too ahead of itself with its rosy expectations. Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, emphasizes the importance of separating realistic expectations from overly optimistic ones: “It’s going to be important for investors to ascertain what expectations that have been embedded are realistic and which expectations are a little bit too optimistic.”
Meanwhile, the US Justice Department and over a dozen states filed an antitrust lawsuit against Apple on Thursday, accusing the tech giant of illegally monopolizing the smartphone market. This suit marks the largest in a series of antitrust actions against Big Tech companies, aiming to curb their power that has gone largely unchecked for decades. Attorney General Merrick Garland stated at a news conference that the lawsuit alleges Apple “has maintained monopoly power in the smartphone market not simply by staying ahead of the competition on the merits but by violating federal antitrust law.”
The complaint, filed in the US District Court for the District of New Jersey, follows years of criticism that Apple has harmed competition by implementing restrictive app store terms, charging high fees, and adhering to a “walled-garden” approach. The company responded by denying the lawsuit’s allegations and stating that it would fight them while expressing concern about potential government intervention in technology design.
Garland argued at Thursday’s press conference that Apple’s actions have far-reaching consequences: “Monopolies like Apple’s threaten the free and fair markets upon which our economy is based. They stifle innovation. They hurt producers and workers and increase cost for consumers.”
The Swiss National Bank (SNB) surprised markets on Thursday by cutting interest rates, making it the first major central bank to do so since they began their post-pandemic price performance. The SNB announced a quarter-point reduction in borrowing costs, along with revised forecasts for lower inflation this year and next: “The fight against inflation over the past two and a half years has been effective.”
Pressure is mounting on the contact Central Bank (ECB) to cut rates for the 20 countries using the euro. Recent economic data suggests that the Eurozone’s economy contracted in March, bolstering the case for the ECB to break with tradition and reduce rates before the US Federal Reserve. The Purchasing Managers’ Index (PMI) showed a slight increase to 49.9 in March, driven by expansion in the services sector but still below the 50 mark separating contraction and growth. Europe’s manufacturers have been grappling with steep energy costs since the Russia-Ukraine conflict, leaving manufacturing in a deep contraction, according to the latest PMI data.
