Inflation drop drives rotation into small caps

Good Afternoon. The small-cap benchmark Russell 2000 index advanced 6% this week, outpacing the S&P 500 by the widest margin since November 2021. It was also the largest one-week point and percentage gain for the small-cap index since November, according to Dow Jones Market Data.

The S&P 500 and Nasdaq indices touched new highs this week, with the S&P crossing 5,600 and Nasdaq crossing 18,500.

CNN's Fear & Greed Index changed from Neutral to Greed and now stands at 56 (Greed) out of 100, a marginal increase of 2 points from last week.

The top five trending stocks on Reddit are Trump Media, Nvidia, SPY, VOO, and Tesla.

Federal Reserve Chairman Jerome Powell, in his testimony before Congress, indicated that there may be a developing case for a rate cut. Powell emphasized that although inflation appears to be declining, further confirmation is required to ensure that this trend is sustainable.

The monthly inflation rate dipped in June for the first time in more than four years, providing further support for the Federal Reserve's decision to start lowering interest rates later this year.

Microsoft has relinquished its seat on the board of OpenAI, and Apple has also canceled its plans to take a similar role. These decisions are believed to be heavily influenced by the rising scrutiny of big technology companies and their links with AI startups.

U.S. bank regulators fined Citigroup $136 million for making "insufficient progress" in fixing data management issues identified in 2020 and required the bank to demonstrate it was putting enough resources toward those efforts.

Citigroup Inc (NYSE: C) reported a second-quarter fiscal 2024 revenue growth of 4% year-over-year to $20.14 billion, beating the analyst consensus estimate of $20.07 billion.

JPMorgan Chase posted second-quarter profit and revenue topped analysts’ expectations as investment banking fees surged 52% from a year earlier. Revenue rose 20% to $50.99 billion, topping the consensus estimate of analysts surveyed by LSEG.

Wells Fargo recorded $11.92 billion in net interest income, a key measure of what a bank makes on lending, marking a 9% year-over-year decline. That was below the $12.12 billion expected by analysts, according to FactSet. The bank said the drop was due to the impact of higher interest rates on funding costs.

PepsiCo missed Wall Street’s estimates for its second-quarter revenue as its three North American business units reported declining volume. The company also gave a more cautious outlook for its full-year sales.

The Bridgewater report takes a a historical look at how market champions of the past have risen and fallen in significance to shed light on how those mechanics may play out today. Bridgewater looked back over the last 120 years at the champions of the past, how long their reign lasted, and the tendencies that led to their decline.

The below chart shows the rise and fall of the largest companies by market cap across different decades (each gray line represents the market cap share of the champions at the start of each decade).

Source - Bridgewater

Today’s champions, the current share of their market cap and earnings, and analyst estimates of long-term growth.

Source - Bridgewater

Major bank’s earnings this week showed signs of consumer slowing down.

Citigroup Inc. is shuttering unused credit card accounts as a growing number of customers fall behind on their payments. The bank has started to see a growing divergence between customers with high credit scores and those with lower credit scores in terms of spending, with less prime customers rapidly pulling back on their spending, Mason said.

Raghuram Rajan discussed that even though the Fed will be successful in bringing inflation down in the short term, we are heading towards an inflationary world over the long term. Structural changes like aging populations, deglobalization, climate change, and restrictive immigration policies are some of the key factors for his conclusion.

Three large US banks failed in 2023 due to the rapid exit of uninsured deposits and unrealized securities losses. Office of Financial Research’s analysis shows that even now, hundreds of banks still have large unrealized securities losses and uninsured deposits that may be vulnerable to significant commercial real estate (CRE) loan losses. This approach, combined with measures of uninsured deposit levels, serves as a way of assessing vulnerable banks. Had the approach been applied to SVB in the second half of 2022, it would have signaled a significant risk of failure up to nine months before SVB’s collapse. As of Q4 2023, 185 banks with $524 billion of assets had unrealized securities losses that exceeded their shareholders’ equity.