The stock market experienced mixed results on Thursday as the first decrease in inflation in nearly two years led to increased speculation that the Federal Reserve might adopt a more aggressive easing policy. This shift in sentiment caused investors to move away from mega-cap stocks and into riskier small-cap stocks.
Key Takeaways
- Inflation Decrease: June’s consumer inflation reading showed a 0.1% month-over-month decline, the first drop in 23 months.
- Rate-Cut Speculation: Traders are now pricing in an 86% probability of a quarter-point rate cut by the Federal Reserve in September.
- Market Reaction: The Nasdaq Composite fell nearly 2%, while the Russell 2000 small-cap index surged by more than 3.7%.
- Stock Movements: Delta Air Lines and Costco saw declines, while PepsiCo reported mixed results.
Inflation and Rate-Cut Speculation
The U.S. Bureau of Labor Statistics reported that headline June CPI declined by 0.1% month-over-month, marking the first decrease in 23 months. On an annual basis, CPI rose 3.0% in June, down from 3.4% in May, beating estimates for a 3.1% gain. Core CPI, which excludes food and energy costs, also surprised to the downside, rising just 0.1% in June compared to the previous month.
Economists had forecasted a 0.1% increase in inflation compared to May. The significant deceleration in shelter costs contributed to the lower-than-expected inflation reading.
As a result, interest rate traders are now assigning an 86% probability to the Federal Open Market Committee (FOMC) enacting its first quarter-point rate cut in September, up from 70% a day earlier.
Market Reaction
The mixed inflation data led to varied reactions in the stock market. The tech-heavy Nasdaq Composite, which had recently hit a record high, plunged almost 2% to 18,283. The broader S&P 500 also fell by 0.9% to close at 5,584. In contrast, the blue-chip Dow Jones Industrial Average added less than 0.1% to finish at 39,753.
However, the small-cap benchmark Russell 2000 rallied more than 3.7%, as investors shifted their focus from mega-cap tech stocks to smaller, riskier stocks.
Stock Movements
- Delta Air Lines (DAL): The stock fell 3.9% after the company met analysts’ expectations for its second quarter but provided a soft outlook for the third quarter. Delta’s operating revenue increased by 6.9% year-over-year to $16.7 billion, but its earnings per share (EPS) decreased by 11.9% to $2.36.
- PepsiCo (PEP): The company reported mixed results for its second quarter, with revenue increasing by 0.8% year-over-year to $22.5 billion. Its EPS increased by 9.1% to $2.28. However, PepsiCo revised its full-year revenue guidance to 4% growth, down from its previous guidance of at least 4%.
- Costco (COST): The warehouse club announced a hike in membership fees for the first time since 2017. The annual membership fees will increase by $5 for non-executives and by $10 for executives in the United States and Canada, effective September 1.
Small Caps Rally
While mega-cap stocks like Nvidia, Apple, and Microsoft have driven much of the market’s gains, small caps have struggled. The Russell 2000, which had been slightly negative for months, saw a significant rally on Thursday.
Higher interest rates have put pressure on small companies’ profitability, contributing to their underperformance. However, if interest rates decrease more rapidly than expected, the risk-reward scenario for small-cap stocks could become more attractive.
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