Two the Point — Market Marvels: The Magnificent Rotation

The recent market shifts and Q2 earnings season highlight a broadening of market participation and improving earnings landscape, with a particular focus on the impact of potential Fed rate cuts and sector rotations.

Key Insights:

• Market Rotation and Fed Rate Cuts:
  • According to the market, the June CPI report on July 11 has led to a 100% probability of a Fed rate cut in September.
  • Investors have shifted from the ‘Magnificent Seven’ tech stocks to interest-rate sensitive sectors like financials, real estate, utilities, industrials, and materials.
• Durable Sector Broadening:
  • Since the CPI report, equity ETFs have seen inflows exceeding $50 billion, with $4.6 billion moving into non-tech sector ETFs and $1.2 billion flowing out of tech sector ETFs.
• Earnings Season Highlights:
  • The ‘Magnificent Seven’ companies are expected to contribute significantly to S&P 500 earnings growth for Q2, with a combined year-over-year earnings growth rate of 56.4%.
  • The remaining companies in the S&P 500 are projected to have a blended earnings growth rate of 5.7% for Q2.
  • Overall, the S&P 500 is anticipated to achieve a blended earnings growth rate of 9.7% for Q2.
• Non-Tech Sector Growth:
  • Analysts predict double-digit year-over-year earnings growth for the remaining companies in the S&P 500 beginning in Q4.
  • This indicates a potential upswing in growth rates for non-tech sectors as the ‘Magnificent Seven’ growth rates begin to moderate.
• Outlook:
  • While U.S. growth has shown some relative weakness, particularly in the consumer sector, market resilience remains strong.
  • The Fed’s potential rate cut in September and possible fiscal support ahead of the election could further support market stability and growth.

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