A cynic who knows the price of everything and the value of nothing might be disappointed with the market's drop on Thursday. An optimist will be pleased with the hefty gains in stocks outside the technology sector.
It was the big tech names of the Magnificent 7 that drove Thursday's declines in the S&P 500 and Nasdaq -- in particular Tesla, Nvidia, and Meta Platforms. In an opposite move to what's been happening over the past two years, the dip in these companies with huge market values dragged down the overall index. But most stocks in the S&P 500 had a great day.
In fact, it looks like the start of a beautiful broadening out of the market's strength. What's more, the "Other 493," as Bank of America calls stocks outside the Mag 7, are about to report their first annual increases in profits since 2022, BofA says.
The prospect of lower interest rates could really help cheaply priced stocks -- think restaurant chains like Jack in the Box, Wendy's, and Outback Steakhouse owner Bloomin' Brands. If they've been struggling, there could be room for them to catch up now.
Federal Reserve Chair Jerome Powell spent a lot of time this week telling Congress he wants to see more evidence of cooling inflation before making a cut. That's exactly what he got on Thursday. The consumer price index fell in June from a month earlier for the first time since 2020. Producer price data and bank earnings on Friday will add more color to the picture.
The next Fed interest-rate decision is due on July 31. Almost no one is expecting a move then -- the Sept. 18 meeting is when most expect some action. But if we get more signs of slowing growth from retail sales and jobs data next week, a surprise early cut shouldn't be ruled out. That would provide even more momentum for this bull rally.
-- Brian Swint
***
The Rotation Out of the Magnificent Seven Is on, for Now
The stock markets have been driven by the Magnificent Seven, but that may be shifting. Investors rotated out of the concentrated big tech names and toward other S&P 500 stocks and small capitalization stocks on Thursday after the cooler than expected inflation report offered a reason to take a chance on other sectors.
-- Among Thursday's biggest stock laggards were Nvidia, down 5.6% and Meta
Platforms, down 4.1%. The small cap Russell 2000 surged 3.7%, while the
tech-heavy Nasdaq sank 2%. The Dow Jones Industrial Average rose 0.1%.
Real estate, utilities, and materials stocks rallied.
-- According to Bank of America strategists, the companies outside the group
that includes Apple, Microsoft, Nvidia, Amazon.com, Alphabet, Meta
Platforms, and Tesla will report higher earnings in the second quarter.
It would be the first yearly increase for these "other" 493 stocks since
the fourth quarter of 2022.
-- The second-quarter profit increase shouldn't be a one-time occurrence,
either. The BofA strategists noted that an uptick in layoffs outside the
tech sector suggests that there is more cost cutting to be done, and that
would lead to margin gains for the non-Magnificent Seven stocks this year
and in 2025.
-- Just 20% of the stocks in the S&P 500 have outperformed the index this
year, a record low according to Torsten Sløk, chief economist at
Apollo Global Management. That means investors either have had to buy
Apple, Nvidia, Microsoft, and the rest, or be content with low
single-digit returns.
What's Next: FactSet estimates say eight of the market's 11 sectors are expected to post earnings growth from the same time a year ago, with healthcare and energy likely to post double-digit increases. Information technology and communications services are also expected to post gains.
-- Paul R. La Monica and Connor Smith
***
CPI Report Bolsters Hopes for September Rate Cut
The latest inflation reading solidified hopes for a September interest rate cut. Two Federal Reserve officials appeared supportive of a rate cut in comments on Thursday after June's consumer price index rose by a smaller than expected amount from last year and fell from the prior month.
-- June CPI rose 3% from the same month last year and fell 0.1% from May,
the first monthly decline since May 2020. The better than expected
numbers, coming after a rise in June's unemployment rate, strengthened
the argument that the economy is cooling.
-- Futures traders see the probability of a September rate cut at around 84%,
rising from a 70% probability on Wednesday before the number was
revealed. The probability of no rate cuts this year fell to 0.8%,
according to the CME FedWatch tool. Traders see rates holding steady this
month.
-- New and used vehicle prices, services costs, and gasoline prices all
fell. Core CPI excluding volatile energy and food prices rose by a
slower-than-expected 0.1% from May and 3.3% from the same time last year.
June producer prices, due out today, could further emphasize a cooling.
-- San Francisco Fed President Mary Daly indicated that recent data makes
her more confident in a policy easing, or rate cut, but she wouldn't
commit to the timing of one. Chicago Fed President Austan Goolsbee said
inflation appears headed back toward the 2% target, making the case for a
cut.
What's Next: Fed officials won't be fully convinced until they see their favorite inflation measure, the personal consumption expenditures price index, due out in two weeks. A flat reading or 0.1% rise could increase the chances of a September cut, while a 0.2% reading could amplify the uncertainty.
-- Megan Leonhardt and Janet H. Cho
***
Tesla Snaps 11-Day Winning Streak Amid Report of Robotaxi Delay
Tesla stock's 11-day winning streak came to a screeching halt on Thursday after a report said CEO Elon Musk's electric vehicle maker is delaying a highly anticipated robotaxi event to October from August. The delay buys time to develop more prototypes to demonstrate, Bloomberg reported.
-- The report cited people familiar with the matter, but Tesla didn't
respond to a request for comment. The shares fell more than 8% on
Thursday after gaining 44% over 11 days, boosted by anticipation over the
robotaxi event plus better than expected delivery numbers and faster
growth in its battery business.
-- Tesla bull Daniel Ives at Wedbush said a two-month delay could make the
robotaxi event and prototypes more eye-popping for Tesla. But a delay
could also signal robotaxis aren't quite ready for the spotlight. Shares
of ride-hailing platforms Uber Technologies and Lyft surged.
-- Tesla's robotaxi rollout would come amid increasing competition, from
General Motors' Cruise division and Alphabet's Waymo, but also from
Chinese manufacturers. In China, robotaxis were a popular trending topic
on social media, CNBC reported. Some cities, such as Wuhan, have
driverless vehicles operated by Baidu's Apollo Go.
-- Musk has talked about working on a fourth "master plan" for Tesla, which
has already rolled out its Cybertruck and is working on a less-expensive
new model that should hit the roads in 2025. Robotics and the robotaxi
are also seen as growth areas for the company.
What's Next: Tesla has been recovering some of the market value it lost since reaching $1 trillion in late 2021, ending Thursday with a market value of around $769 billion. It will report second-quarter results on July 23, with analysts expecting earnings of 60 cents on revenue of $24 billion.
-- Al Root and Janet H. Cho
***
Mortgage Rates Trend Lower and Could Continue to Drop
Mortgage rates inched down again this week and are now below the level where they were one year prior for the first time since 2021. It's another in a string of recent signs the housing market is getting slightly buyer-friendly, including price cuts to listings and more houses available for sale.
-- The rate on the typical 30-year mortgage dropped to 6.89% from 6.95% a
week prior, according to Freddie Mac. A year ago the rate was 6.96%. This
week's rate wasn't influenced by June's consumer price index, meaning
more declines could be on the way.
-- The number of new homes for sale at the end of May was at its highest
since early 2010, census data show. Additional drops in rates could spur
even more demand. Mortgage rates in the low 6% range would be the "sweet
spot" for demand, said. Raymond James analyst Buck Horne.
-- Shifting expectations for the timing of interest rate cuts, which affect
mortgage rates and rates on many other types of loans, has kept home
financing costs relatively high, housing market transaction volume low,
and home builder stocks under pressure. Gross margins for home builders
could be weighed by incentives used to lure buyers.
-- Raymond James' Horne said he was cautious about builders courting
entry-level buyers, and prefers shares of luxury builder Toll Brothers,
which is more resilient amid interest-rate volatility because of its
relatively wealthier customer base.
What's Next: Economists foresee 30-year fixed mortgage rates averaging 6.6% or higher through the end of 2024, according to forecasts from the Mortgage Bankers Association, the National Association of Realtors, and Fannie Mae. Rates are expected to inch down by fourth-quarter 2025, but stay at or above 6%.
-- Shaina Mishkin and Janet H. Cho
***
Do you remember this week's news? Take our quiz below to test your knowledge. Tell us how you did in an email to thebarronsdaily@barrons.com.
1. Southwest Airlines, which is trying to fend off an activist campaign by Elliott Investment Management, named the founder of which of the following airlines to its board of directors earlier this week?
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July 12, 2024 06:29 ET (10:29 GMT)
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