29.07.202409:50 Forex Analysis & Reviews: Inflation data, tech gains lift Wall Street

Wall Street's major indexes closed higher on Friday as investors turned their attention back to Big Tech. That followed a massive sell-off earlier in the week, and positive inflation data bolstered confidence that the Federal Reserve could soon begin cutting interest rates.

While the S&P 500 (.SPX) and Nasdaq Composite (.IXIC) both posted gains, they failed to fully recover from their losses in the previous two sessions. Both indexes ended the week lower, marking their second straight weekly decline.

The Dow Jones Industrial Average (.DJI) ended the week higher, helped by gains in industrial conglomerate 3M (MMM.N). Shares of the company jumped 23%, their biggest daily percentage gain in decades, after the company raised the lower end of its full-year adjusted profit forecast.

Investors spooked by recent volatility are bracing for earnings from major tech companies, a Federal Reserve meeting and employment data to be closely watched next week. These events could determine the near-term trajectory of U.S. stocks after a period of wild swings.

A multi-month rally in Big Tech stocks stalled in the second half of July, triggering a sell-off. The S&P 500 and Nasdaq Composite indexes posted their biggest one-day losses since 2022 on Wednesday, following disappointing earnings reports from Tesla (TSLA.O) and Google parent Alphabet (GOOGL.O).

Five of the seven stocks in the so-called "Magnificent Seven" rose 2.7% on Friday. The exceptions were Tesla (TSLA.O) and Alphabet (GOOGL.O), whose weak results on Wednesday triggered a broad sell-off in the market. Both companies fell 0.2%, with Alphabet's shares hitting their lowest close since May 2.

The release of more earnings reports from the "Magnificent Seven" next week could have a significant impact on the near-term outlook for the market, as they will determine its future direction.

"What we see from Apple, Microsoft and Amazon.com next week will really determine whether the current stock rotation continues and which direction the market goes," said Greg Bootle, head of U.S. equity and derivatives strategy at BNP Paribas.

Market rotation refers to investors moving from high-growth stocks with high valuations to less valued sectors such as mid- and small-cap stocks.

This process appears to have accelerated in recent weeks, as small-cap indices such as the Russell 2000 (.RUT) and the S&P Small Cap 600 (.SPCY) hit their fourth weekly closing highs.

The Russell 2000 (.RUT) posted its third straight weekly gain, its best three-week performance since August 2022.

These small-cap, economically sensitive companies were supported on Friday by a modest rise in U.S. prices in June, highlighting weakening inflation and potentially opening the door for the Fed to begin easing policy as early as September.

The probability of a 25 basis point rate cut at the Fed's September meeting remained unchanged at about 88% following the release of PCE inflation data, according to CME FedWatch data. Traders continue to expect two rate cuts by December, LSEG data show.

"We do think the robust economic data is supportive of broader trading," said Adam Hetts, global head of multi-asset at Janus Henderson, noting that small-cap stocks have outperformed the S&P 500 by more than 10% over the past month.

The rise in trading activity has also helped lift cyclical sectors. All 11 sectors of the S&P 500 index rose on Friday, led by industrials (.SPLRCI) and materials (.SPLRCM).

On Friday, the S&P 500 (.SPX) rose 59.88 points, or 1.11%, to 5,459.10, while the Nasdaq Composite (.IXIC) rose 176.16 points, or 1.03%, to 17,357.88. The Dow Jones Industrial Average (.DJI) rose 654.27 points, or 1.64%, to 40,589.34.

Over the past week, the Dow has gained 0.75%, while the S&P 500 has fallen 0.82% and the Nasdaq has fallen 2.08%.

Among the companies that saw their shares rise on positive earnings reports were Deckers Outdoor (DECK.N), which jumped 6.3% after raising its full-year profit forecast, and oilfield services company Baker Hughes (BKR.O), which rose 5.8% after it beat second-quarter profit estimates.

Norfolk Southern (NSC.N) shares rose 10.9%, its biggest one-day gain since March 2020, after the rail operator posted quarterly profit that beat Wall Street expectations, thanks to strong pricing for its services.

Meanwhile, shares of medical equipment maker Dexcom (DXCM.O) plunged 40.6% after cutting its full-year revenue forecast, causing significant disappointment among investors.

Trading volume on U.S. exchanges totaled 10.92 billion shares, below the 20-day average of 11.61 billion shares.

While the S&P 500 is still just 5% below its all-time high and has gained nearly 14% this year, some investors are beginning to worry that Wall Street may be overly optimistic about future earnings growth. That could leave stocks vulnerable if companies fail to meet expectations in the coming months.

Investors are also looking ahead to comments from the Federal Reserve's meeting on Wednesday to see if policymakers plan to cut interest rates, something many market participants expect in September. Employment data due later in the week, including the monthly labor market report, could provide a clearer picture of how severe the labor market slump is becoming.

These events could have a significant impact on the future direction of the market, and investors will be watching closely to adjust their strategies and mitigate risk.

"This is a critical time for the markets," said Bryant VanCronkhite, senior portfolio manager at Allspring. "Investors are starting to question why they are paying such high prices for AI-related companies, while the market is worried that the Fed may miss out on a soft landing, causing significant volatility."

Recent weeks have shown a shift away from leading tech giants and toward sectors that have long been overlooked, including small-cap and value stocks like financial institutions.

The Russell 1000 Value Index has gained more than 3% over the past month, while the Russell 1000 Growth Index has fallen nearly 3%. The Russell 2000 Small Cap Index has gained nearly 9% over the period, while the S&P 500 has lost more than 1%.

Markets are currently fairly certain that the Fed will begin cutting interest rates at its September meeting, with a 66 basis point cut forecast by year-end, according to the CME FedWatch tool.

Expected employment data due later this week could change those forecasts. If the data shows the economy is slowing more quickly, the odds of a rate cut could increase. Conversely, if employment picks up, it could signal an economic recovery, which could in turn impact the Fed's decisions.