Falling rates and softer inflation contribute to a reversal in market leadership
July 2024
Key Observations
- Softer inflation data released in July pushed interest rates lower and market expectations for a September Fed rate cut are almost fully priced in. More rate-sensitive assets fared well.
- Market leadership shifted on the back of lower rate expectations and the positive impact it may have on small cap equities, which had their third-best month relative to large cap since 1979.
- The darling AI stocks and other Mag 7 positions took a step back in July. Investor questions surrounding future earnings, capex and the future monetization of AI all took hold and contributed to the selloff in the back half of the month.
Market Recap
The second half of the year kicked off with no shortage of events. A favorable inflation print, weakening labor market data and political events surrounding the fall election all contributed to the spike in volatility during the month. Expectations of an interest rate cut from the Federal Reserve continue to underpin investor sentiment and we saw a significant shift in market leadership (which we explore below) following the CPI release mid-month. The concentrated large cap leadership from the first half of the year changed course with the S&P 500 Index producing a modest positive return, while U.S. small cap equities (Russell 2000 Index) had a standout month. International equities also moved higher with developed markets (MSCI EAFE Index) producing a modest positive return while emerging markets (MSCI EM Index) were roughly flat for the month. Increased rhetoric and uncertainty about foreign tariffs negatively impacted China, one of the weaker performing regions within emerging markets.
