Key Takeaways
- S&P 500 Hits 38th Record High
- Russell 2000 Outperforms Nasdaq, Extends Five-Day Winning Streak
- Optimism Rises For Earnings And Potential Interest Rate Cuts
Stocks closed higher on Tuesday as gains continued spreading out beyond the tech sector. The S&P 500 set its 38th record high close for the year, gaining 0.64%. The Nasdaq Composite added 0.2%. The big winners for the day though were the Dow Jones Industrial Average and Russell 2000. The Dow recorded its biggest one day move since June of 2023, gaining 1.85% and setting a record high. However, the standout performers were small cap stocks.
The Russell 2000 is riding a five-day win streak after adding another 3.4% Tuesday. Over the course of this recent run, small caps have outperformed the Nasdaq by 11%. According to The Wall Street Journal, that is the largest outperformance since December of 2020. The Russell has also outperformed the S&P 500 by 10% over that same period, which is the widest outperformance on record, going back to 1986.
One theme I’ve harped on quite a bit over the past couple years is concentration risk. Markets cannot continue indefinitely higher on the backs of just a handful of stocks. That was the case, with the Magnificent Seven doing the heavy lifting. In the past week however, we’ve seen a broadening of the leadership as small cap stocks have stolen the spotlight. I think that is crucial and could be the catalyst the overall market needs to continue heading higher.
Broadening market participation comes at a time when we’re seeing a combination of cooling economic data, hopes for an interest rate cut or cuts and optimism surrounding earnings. According to the CME Fed Watch Tool, while there is little reason to expect an interest rate cut when the Federal Reserve meets at the end of this month, there is currently a 100% probability of a rate cut when the Fed meets in September. There is an almost 65% chance of a second rate cut in November.
As I mentioned above, there is also optimism this will be a very strong earnings season. Through last Friday, expectations are earnings for the S&P 500 will increase by 9.3% in the second quarter, according to FactSet. This morning, shares of Johnson and Johnson are flat after the company beat on both earnings and revenues but offered a mixed outlook. After the close, United Airlines will report.
I think we could be witnessing a bit of a goldilocks scenario unfolding. Earnings growth is forecast to be strong. Economic data is expansionary but at a rate that allows for interest rates to come down. Topping things off is the wider breadth of stocks propelling indices higher. If we can continue on this path, it’s hard to find a good reason to be bearish. That isn’t to say we won’t see pullbacks at times, but the overall picture is healthy.
For today, I’m watching small cap stocks. After five solid days of gains, a little profit taking wouldn’t surprise me. Whether that comes today or at some point in the next few days, I’m particularly interested to see how stocks respond when we do eventually get that profit taking. In premarket trading, the Russell 2000 is down slightly while the Nasdaq 100 and S&P 500 are down around 1% each. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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