June's consumer price index, released on July 11th, showed a surprising drop in inflation levels to 3%, down from the previous month’s 3.3% and better than the market expectation of 3.1%. The result was a market rally to record high of 5664 on the S&P 500 Index before reversing course to 5504 as of this writing. However, even that volatility masked an even more dramatic shift in the market where interest sensitive sectors such as small cap stocks, banking stocks, and utilities each rose more than 7%, while previous market leaders, dominated by the magnificent 7 stocks of NVIDIA, Apple, Microsoft, Google, Meta, Tesla, and Amazon declined by over 7% during the same period.
Some see the rotation as an indicator of a stalling market while others see the rotation as a positive sign, an indication that the market rally is broadening including more sectors. We fall in the latter camp. Up to this point, the stock market rally has been driven by a handful of companies that promise to benefit from Artificial Intelligence. The broadening of the market rally is a sign of increasing confidence in the broader economy, and increasing hope that the Federal Reserve will be able to lower rates in the coming months.
Once again inflation is the most important factor driving the market. While there's still a long way to go before inflation falls to the federal reserve's 2% target, June’s inflation numbers continue to show moderating inflation that could reach the Federal Reserve target by the end of the year.
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