Trading places

On July 5, the Nasdaq 100 (NDX) tech index was up more than 21% for the year and the Russell 2000 (RUT) small cap index was in negative territory. As of Friday, the RUT trailed the NDX by less than two percentage points.

Between those two extremes, the S&P 500 (SPX): up solidly for the year, but coming off back-to-back down weeks for the first time since April.

Weakness in the first megacap tech companies to release Q2 earnings highlighted last week’s sell-off, driving the NDX to its biggest one-day loss since October 2022 (-3.7% on Wednesday). The market rebounded solidly on Friday, but not quite enough for the SPX to salvage the week:

The headline: Tech nears correction territory.

The fine print: At last Thursday’s low, the Nasdaq 100 (NDX) tech index was down 9.5% from its July 10 close—its biggest pullback of the year. Tech volatility overshadowed the week’s economic data, including a stronger-than-expected initial Q2 GDP reading and a PCE Price Index that showed inflation was more or less holding steady.

The number: 3. For the third week in a row, the RUT was the strongest index and the NDX was the weakest—the first time that’s happened in at least six years.

The scorecard: The RUT posted its second-biggest weekly gain of the year:

Sector returns: The strongest S&P 500 sectors last week were health care (+1.5%), utilities (+1.5%), and materials (+1.4%). The weakest sectors were communication services (-3.7%), tech (-2.5%), and consumer discretionary (-2.3%).

Stock movers: On Thursday, Goosehead Insurance (GSHD) +29% to $84.89, and Viking Therapeutics (VKTX) +28% to $64.68. On the downside, MaxLinear (MXL) -37% to $14.02 on Thursday, DexCom (DXCM) -41% to $64 on Friday.

Futures: September WTI crude oil (CLU4) ended a volatile week nearly $1.50 lower at $77.16. After tagging a three-week intraday low on Thursday, August gold (GCQ4) rallied Friday to end the week down $18.10 at $2,381. Week’s biggest gains: September rough rice (ZRU4) +7%, December soybean meal (ZMZ4) +5.6%. Week’s biggest declines: July ether (ETHN4) -8.5%, September natural gas (NGU4) -5.7%.

It’s “big” week on the earnings calendar. Big tech will get most of the attention, but big pharma, big oil, and big consumer names are also scheduled. Some highlights:

●Monday: McDonald's (MCD), On Semiconductor (ON), F5 (FFIV), Lattice Semiconductor (LSCC), PayPal (PYPL), Rambus (RMBS)
●Tuesday: Archer Daniels Midland (ADM), Caterpillar (CAT), Eagle Materials (EXP), Merck (MRK), Pfizer (PFE), Procter and Gamble (PG), Advanced Micro Devices (AMD), Arista Networks (ANET), Electronic Arts (EA), First Solar (FSLR), Microsoft (MSFT), Match Group (MTCH), Qorvo (QRVO), Starbucks (SBUX)
●Wednesday: AutoNation (AN), Boeing (BA), Kraft Heinz (KHC), Verisk Analytics (VRSK), Arm Holdings (ARM), Carvana (CVNA), eBay (EBAY), Exact Sciences (EXAS), Lam Research (LRCX), Meta Platforms (META), Paycom (PAYC), Qualcomm (QCOM)
●Thursday: ConocoPhillips (COP), Hershey (HSY), Kellanova (K), Moderna (MRNA), Roblox (RBLX), Apple (AAPL), Amazon (AMZN), Booking Holdings (BKNG), Coinbase (COIN), Intel (INTC)
●Friday: Chevron Corp (CVX), United States Cellular (USM), Exxon Mobil (XOM)

A key week of economic data features the monthly jobs report and a Fed interest rate announcement:

●Tuesday: S&P Case-Shiller Home Price, FHFA House Price Index, Job Openings and Labor Turnover Survey (JOLTS), Consumer Confidence
●Wednesday: ADP Employment Change, Chicago PMI, Pending Home Sale, Fed interest rate decision
●Thursday: Challenger Job Cut Report, Productivity and Labor Costs, S&P Global Manufacturing PMI, ISM Manufacturing Index, Construction Spending, ISM Manufacturing Index
●Friday: Employment Report, Factory Orders

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Morgan Stanley & Co. strategists recently weighed in on bullish small-cap sentiment. They believe the recent outperformance of lower-quality, small cap stocks is primarily a function of softer inflation data and hopes for an earlier Fed cut, combined with “dealer demand and short covering” in light of Donald Trump’s recently improved odds of winning another presidential term.¹

The unpredictability of the election aside, the analysts argue the economic cycle is now more important than the occupant of the White House in terms of stock market performance and sector relative strength. And we’re at a much different position in the cycle now than in 2016. As they note, many of the cyclical trades investors may assume would outperform in a Trump presidency actually perform best in the early phase of an economic expansion (e.g., 2020-2021) rather than in late-cycle environments like the current one.

History, they conclude, suggests large-cap growth tends to outperform once the Fed begins cutting interest rates.

Online event: Join us today (July 29) at 4:30 p.m. ET for an on-demand event featuring Morgan Stanley Wealth Management’s Head of Market Research and Strategy, Dan Skelly, who will discuss what may be in store for investors the remainder of this year. To watch, click this link to log into your account, you will automatically be taken to the landing page.

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¹ MorganStanley.com. Business Cycle May Trump Politics. 7/22/24.