Small Caps Beat Nasdaq 100 By Most Since 2011: Markets Wrap

(Bloomberg) -- Stocks hit all-time highs as bets the Federal Reserve will soon start cutting rates fueled a rally in riskier corners of the market.

Wall Street extended a pattern of money rotating into small caps and out of the megacap “safety” since last week’s soft inflation data. Over the past four sessions, the Russell 2000 has beaten the Nasdaq 100 by almost 11 percentage points — a feat not seen since 2011. An equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — outpaced the US equity benchmark. That index is less sensitive to gains from the biggest companies — providing a glimpse of hope the rally will broaden out.

“While we are not ‘most preferred’ on small caps, they are historically cheap on a relative basis, and could snap back quickly should interest rates fall and growth remain resilient,” said Solita Marcelli, at UBS Global Wealth Management.

The strength of the equity market has been underpinned by optimism the economy has withstood the worst of Fed tightening. In this regard, Tuesday’s better-than-estimated retail sales report was a “healthy” development, according to Bret Kenwell at eToro. It’s better to see the Fed cutting rates on falling inflation than to see the central bank rushing to bolster a weakened economy, he noted.

The S&P 500 hovered near 5,645. The Dow Jones Industrial Average rose 1.5%. The Russell 2000 gained 2.5%, poised for its biggest five-day run since April 2020. The Nasdaq 100 was little changed. The rotation out of this year’s winners saw the iShares MSCI USA Momentum Factor ETF underperforming.

Traders also waded through financial earnings. Bank of America Corp. rose after saying net interest income would climb by the end of the year. Morgan Stanley dropped as results from its key wealth business fell short of estimates. Charles Schwab Corp. sank as new brokerage accounts missed estimates. 

Treasury 10-year yields fell four basis points to 4.19%. Gold hit a record high on bets the Fed will soon be able to pivot.

“Retail spending in June was expected to confirm signs of an economic slowdown, but instead has breathed new life into the argument that Fed officials don’t need to worry about a sluggish real economy yet,” said Mark Streiber at FHN Financial. 

US retail sales, excluding the impact of a cyberattack on auto dealerships, rose in June by the most in three months, a sign consumers regained their footing at the end of the second quarter. Total retail sales were unchanged, restrained by a 2% slide in receipts at auto dealers. The figures aren’t adjusted for inflation.

“This report doesn’t negate expectations that the Fed will cut rates at its September meeting, unless of course inflation-related data releases indicate an uptick in prices,” said Quincy Krosby at LPL Financial.

Fed Chair Jerome Powell said Monday that second-quarter economic data has provided policymakers greater confidence that inflation is heading down to the central bank’s 2% goal, possibly paving the way for near-term interest-rate cuts.

Corporate Highlights:

• Goldman Sachs Group Inc. and Wells Fargo & Co. are joining rival JPMorgan Chase & Co. in tapping the US investment-grade bond market after reporting second-quarter earnings.
• PNC Financial Services Group Inc. notched its first increase in net interest income since the end of 2022, setting itself up for what it expects to be a record year of NII growth in 2025.
• Microsoft Corp.’s investment into Inflection AI will get a full-blown UK antitrust probe, after the watchdog said it needed to take a closer look at the hiring of former employees from the artificial intelligence startup.
• Philip Morris International Inc. is expanding production of Zyn in the US as the popular oral nicotine pouch becomes increasingly hard to find because of soaring demand.
• Starboard Value became the third activist investor this year to take a stake in Match Group Inc., the owner of the dating app Tinder whose paying customer base has shrunk for six straight quarters.

Key events this week:

• Eurozone CPI, Wednesday
• US housing starts, industrial production, Wednesday
• Fed Beige Book, Wednesday
• Fed’s Thomas Barkin speaks, Wednesday
• ECB rate decision, Thursday
• US initial jobless claims, Philadelphia Fed manufacturing, Conference Board LEI, Thursday
• Fed’s Mary Daly, Lorie Logan and Michelle Bowman speak, Thursday
• Fed’s John Williams, Raphael Bostic speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2% as of 12:18 p.m. New York time
• The Nasdaq 100 fell 0.5%
• The Dow Jones Industrial Average rose 1.4%
• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro was little changed at $1.0884
• The British pound fell 0.1% to $1.2951
• The Japanese yen fell 0.3% to 158.61 per dollar

Cryptocurrencies

• Bitcoin rose 1.1% to $64,472.37
• Ether rose 0.7% to $3,460.31

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.19%
• Germany’s 10-year yield declined five basis points to 2.43%
• Britain’s 10-year yield declined five basis points to 4.05%

Commodities

• West Texas Intermediate crude fell 1.2% to $80.95 a barrel
• Spot gold rose 1.6% to $2,459.90 an ounce

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Lu Wang, Jessica Menton and Esha Dey.

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