“We all love to win, but how many people love to train?” ― Mark Spitz, Olympic swimmer and gold medalist

Good evening,

This week illustrated the extent to which large-cap Technology stocks affect broader indices such as the S&P 500 and the Nasdaq. Tech stocks – particularly semiconductor stocks – retreated this week after negative news from both sides of the political aisle. The Biden administration discussed the possibility of tougher restrictions on the sales of chip technology to China, while former President Donald Trump cast doubts on U.S. military support for Taiwan should China attempt an invasion. The subsequent decline in Tech stocks caused the S&P 500 and Nasdaq to stumble.

Still, we saw promising moves from non-Tech sectors, prompting Fundstrat Head of Technology Mark Newton to tell us during our weekly research huddle that “my thinking is that the ‘Great Rotation’ has begun.” He noted that “Large-cap Tech has stalled out a bit, and this week we saw one of the largest daily declines in the Nasdaq in two years.” However, despite the declines in the broader indices, Newton said, “I'm finding it difficult to get all that negative on the market just because the breadth has actually gotten so good in recent weeks. I think it's actually a very encouraging sign that we've seen such strength out of many of the lagging sectors, for example in Biotech, regional banks, and Small-caps.”

Fundstrat Head of Research Tom Lee also noticed the move in Small-caps – something he had been anticipating. To Lee, this was largely the result of the astonishingly low June CPI data released during the previous week. This prompted Federal Reserve officials to hint at more dovish outlooks this week: 

• Fed Governor Christopher Waller described June CPI as “the second month of very good news”, noting that, in his opinion, “the time to lower the policy rate is drawing closer.” 
• The New York Fed’s John Williams told the Wall Street Journal this week that data from the past three months “seems to be getting us closer to the disinflationary trend that we’re looking for [...] We are seeing a broad-based disinflation.”
• Fed Chair Jerome Powell told the audience at the Economic Club of Washington that, “We’ve had three better readings, and if you average them, that’s a pretty good pace” that  "add[s] somewhat to [the Fed’s] confidence" of inflation approaching the central bank’s desired target.

Fundstrat Head of Data Science “Tireless Ken” Xuan said that, in his view, “we’re seeing the Fed’s tone start to shift toward cutting.” At our weekly huddle, Xuan reminded us that “this is how the Fed works” – preferring not to shock the market with sudden policy announcements. Tireless Ken also asserted that the Fed’s Beige Book this week showed signs of a slower economy in more districts and regions, arguably “adding more color to the ‘Fed cut’ narrative.” 

All of this has helped drive the probability of a Fed rate cut in a near-term FOMC meeting (as implied by Fed Funds futures trading) to 98% as of Friday, a significant increase from the 70% we saw before the release of June CPI. As Lee pointed out, “this is the first time since 2019 in which the probability of a rate cut at a near-term future FOMC meeting has risen above the 80% level,” and it is part of why he sees the current Small-caps rally likely continuing. “This rally, we believe, could reach 40% over the next 10 weeks,” he told us. 

How does Lee see the “Summer of Small-caps” (as he calls it) potentially unfolding? “We are only one week into this rally, but it is tracking very closely to the October to December 2023 small-cap rally,” he pointed out. Both rallies began with an initial surge, followed by a slight decline. In both rallies, this correction was marked by similar valuation (as measured by small cap P/E relative to the S&P 500). In late 2023, the correction was followed by a larger advance. Lee believes recent history could repeat itself. The comparison of  Small-cap performance between late 2023 and now is shown in our Chart of the Week:

Crowdstrike

Shares of CrowdStrike (CRWD 5.16% ), a Granny Shot stock, sank more than 11% on Friday in response to news that what appears to have been a routine – but clearly problematic – update from the cybersecurity firm caused millions of machines running Microsoft software to crash. Major companies and institutions in virtually every industry, sector, and geography were affected, with frustrated travelers stranded in airports serving as perhaps the most visible illustration of the outage’s impact. (Some 3,500 flights were grounded around the world due to the outage.) Trading operations at financial institutions around the world were also disrupted, though the London Stock Exchange appears to have been the only major exchange affected.

Although some users were able to get up and running again shortly, the actual fix could take weeks, because, in many cases, an IT administrator will need to manually address issues on each affected machine. The extent of the impact of what many are calling the worst IT outage in history is unclear. In addition to the obvious criticisms sure to be leveled at Crowdstrike, others have pointed out potential consequences for Microsoft (MSFT 0.95% ) – despite the company not being directly at fault; for the global supply chain, including air- and ocean-cargo shipping; and in banking, with disruptions in the next payroll cycle a distinct possibility. The S&P 500, Nasdaq, and Dow all declined on Friday.

Elsewhere

China’s economy missed expectations in 2Q2024, growing 4.7% as the country’s property crisis, local-government debt, and high youth unemployment continued to weigh on both consumer spending and GDP.

The Wall Street Journal’s Evan Gershkovich was sentenced to 16 years in a high-security Russian prison after what the Journal called a “disgraceful, sham conviction”. Gershkovich, first detained in early 2023, was accused of spying on behalf of the CIA – charges that the U.S. government has unequivocally denied, and that Jay Conti, general counsel for WSJ publisher Dow Jones, has described as “bogus charges that are completely trumped up.”

HSBC named its next CEO, Georges Elhedery, effective September 2, 2024. The appointment comes after a surprise retirement announced in April by current CEO Noel Quinn. Elhedery is an HSBC veteran, now serving as CFO and having previously run the bank’s global markets business.

Headline inflation in the U.K. remained steady at the target rate of 2% in June. Core inflation also remained unchanged from its May levels, coming in at 3.5%. The macroeconomic news incorporates surging hotel prices possibly driven by a series of 10 Taylor Swift concerts, though those were offset by declines in clothing and food prices.

Amazon said this year’s Prime Day two-day event was its “biggest ever” in terms of revenue, without disclosing details. Independently, Adobe Analytics reported that during the two-day event, online sales hit  $14.2 billion, an 11% increase from 2023. Online purchases in general tend to surge during Prime Day, as other retailers also hold sales to compete. 

And finally: The Tuscan estate and former residence of Lisa del Giocondo, the noblewoman depicted in Leonardo da Vinci’s Mona Lisa, is on the market. Villa Antinori, a 43,000 square-foot residence on a 67-acre estate just three miles from Florence’s city center, has been owned by del Giocondo’s family since 1498. The family is asking EUR 18 million (US$19.66 million).