On a high note, US stocks closed a turbulent week, buoyed by positive inflation data and hopes for interest-rate cuts. The Dow Jones surged 1.6%, or over 650 points, while the S&P 500 and Nasdaq Composite each saw gains of around 1%.
After a week of volatility, stocks rebounded as confidence in the AI trade wavered and attention shifted to small-cap stocks. Concerns about a weakening economy were somewhat eased by a strong GDP report, adding to the optimism.
The key highlight was the Personal Consumption Expenditures (PCE) index, which indicated a gradually cooling inflation. This sets the stage for the Federal Reserve’s upcoming meeting, where rates are expected to remain unchanged, fueling speculation about possible cuts in September.
Investors are now looking ahead to next week's major tech earnings from Apple, Microsoft, Amazon, and Meta.
Stocks Flash Optimism After a Volatile Week
After a rollercoaster week that saw investors ditch Big Tech and major indexes take a hit, stocks bounced back on Friday. The Dow surged over 650 points, clinching a win for the week.
The Dow Jones Industrial Average (^DJI) climbed 1.6%. The S&P 500 (^GSPC) rose about 1.1%, and the Nasdaq Composite (^IXIC) added 1%, though both indexes ended the week in the red.
Big Tech Earnings to Test AI Spending Limits
Google learned the hard way what happens when hefty AI spending meets slowing ad growth. This tough week for Google could hint at challenges for other tech giants reporting earnings soon. Shares of Alphabet (GOOG, GOOGL) dropped over 6% after revealing higher-than-expected AI spending and slowing ad growth, showing that investor patience for unproven AI ventures has its limits.
However, Google's situation might be unique, as scrutiny on AI spending intensifies when other business areas weaken. Wall Street's patience waned when Google's main ads business came under pressure. Next up, Amazon (AMZN), Meta (META), and Microsoft (MSFT) will report earnings, testing investor tolerance for their AI spending.
The Fallout from the CrowdStrike Outage
Nearly a week after a massive IT outage, CrowdStrike (CRWD) revealed that a single software update caused global disruptions, grounding planes, halting hospital procedures, and closing businesses. Shares of CrowdStrike dropped about 16% this week.
While most companies are back to normal, this incident highlights the fragility of our internet infrastructure. Microsoft's estimate of 8.5 million affected systems shows how even a few compromised devices can have widespread effects. This outage also underscores a bigger issue: a few companies have a huge impact on internet operations.
Weekly News
Bank of America Strategist Warns of Market Pullback
As stocks retreat from all-time highs, Bank of America's top strategist, Sebastian Raedler, urges caution. He predicts the S&P 500 could drop 2.6% to 5,400, and European equities might decline by 15%.
Raedler cites classic bearish signals: market peaks, low risk premiums, high earnings and margins, and a late-stage U.S. macroeconomic cycle. The S&P 500 hit a record 5,667 last week before dipping. Rising unemployment to 4.1% in June, the highest since October 2021, is another red flag.
Additional concerns include a 15% rise in initial jobless claims and decreasing hiring intentions among small to medium-sized companies. These conditions typically lead to higher risk premiums and lower asset prices.
Despite this, Hani Redha of Pine Bridge Investments remains optimistic, quoting Peter Lynch: “Far more money has been lost by investors preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
Ether ETFs Debut Amid Mixed Expectations
Tuesday’s launch of ether exchange-traded funds (ETFs) is significant for crypto but may not match bitcoin ETFs' success. Anthony Pompliano, CEO of Professional Capital Management, told CNBC that while bitcoin is seen as "digital gold," Ethereum faces more competition as a technology platform.
Ether’s market size is about one-fourth of bitcoin's, and these ETFs debut six months after bitcoin ETFs, which drew over $16 billion. Pompliano noted that Ethereum’s staking and cash flow benefits aren’t available to ETF holders, potentially limiting inflows.
Mike Novogratz, CEO of Galaxy Digital, expects ether ETF inflows to be about 20% of bitcoin ETFs in the first six months but sees the launch as crucial for broader crypto adoption. He highlighted that ETFs simplify market entry for both individual investors and institutions.
Ether ETFs Debut Amid Mixed Expectations
Tuesday’s launch of ether exchange-traded funds (ETFs) is a significant moment for crypto, though it may not match the success of bitcoin ETFs. Anthony Pompliano, CEO of Professional Capital Management, told CNBC that while bitcoin is viewed as "digital gold," Ethereum faces more competition as a technology platform.
Ether’s market size is about one-fourth of bitcoin's, and these ETFs debut six months after bitcoin ETFs, which drew over $16 billion. Pompliano noted that Ethereum’s staking and cash flow benefits aren’t available to ETF holders, potentially limiting inflows.
Mike Novogratz, CEO of Galaxy Digital, expects ether ETF inflows to be about 20% of bitcoin ETFs in the first six months but sees the launch as crucial for broader crypto adoption. He emphasized that ETFs make it easier for both individual investors and institutions to enter the crypto market.
Shift from Megacap Tech to Small-Cap Stocks Gains Momentum
Investors are moving from megacap tech to small-cap stocks, says Tom Lee of Fundstrat. Disappointing earnings from Tesla and Alphabet caused major indexes to drop, while the small-cap Russell 2000 only fell 2.1% and rose 7.2% in July.
Lee expects this trend to continue, driven by potential Fed rate cuts and possible deregulation from a Trump re-election. Historically, small caps outperform large caps, aided by favorable interest rates and reshoring trends.
Despite risks, focusing on quality small-cap companies with strong balance sheets, like Summit Materials and Cohu, can mitigate these challenges.
Inflation Data Sparks Optimism for Fed Rate Cuts
Improving inflation news has boosted hopes for Fed rate cuts. The annual inflation rate dropped to 2.5%, prompting expectations for a September rate cut, with more by year-end.
The core PCE index was slightly higher at 2.6%. Investors are pricing in 25 basis-point cuts in September and December, with strong chances for November and January, potentially reducing the federal funds rate by 100 basis points in six months.
Market probabilities show a 90% chance for a September cut and 67% for November. Recent Fed comments suggest a leaning towards easing rates, with significant policy announcements expected at the Jackson Hole symposium in August.
Comments