The S&P 500 closed 1.1% higher on Friday, the Nasdaq 100 gained 1%, and the Dow surged 654 points.
Market sentiment was buoyed by new data suggesting easing inflation, reinforcing expectations for a potential interest rate cut in September.
All sectors posted gains, led by industrials as 3M soared 23.1%, marking its best day since at least 1972.
Deckers Outdoor jumped 6.5% on upbeat quarterly results, while Coursera surged 44.8% following an 11% increase in second-quarter revenue.
In contrast, DexCom plunged 40% after lowering its fiscal-year sales forecast.
Large capitalisation technology stocks have led the market higher year-to-date.
The S&P 500 index is a market cap weighted index with the 10 largest stocks representing 35% of the total index. As of about two weeks ago, the S&P 500 was up roughly 16% versus the equal-weighted S&P 500 index (RSP) and small capitalisation Russell 2000 index (IWM) up 5% and 1%, respectively.
Since July 11 when CPI inflation data was reported lower than expected, the “rest-of-the-market” made a significant catch-up move relative to the S&P 500. The RSP and IWM are now up high single-digits and the S&P 500 has pulled back to a low teens level of appreciation.
Although lower inflation and interest rates disproportionately benefit the average company rather than the mega-cap company (average companies have larger borrowing needs than cash-rich, large-cap technology companies), it may not be the only reason the average stock is beginning to catch up.
Year-over-year earnings growth rates of the S&P 500 ex-Magnificent 7 (Apple, Microsoft, Google/Alphabet, Amazon, Nvidia, Meta and Tesla) have substantially lagged the earnings growth rates of the Mag 7 over the past five quarters - by the end of this year, the growth rates are expected to be equal.
Investment firm, Guggenheim, is estimating that S&P 500 earnings rise from about $244 in 2024 to above $300 in 2026. For the average company, earnings are accelerating. For the market, earnings are broadening out. Accelerating and broadening earnings should allow the bull market to continue over time.
Thursday morning, the Bureau of Economic Analysis reported “real gross domestic product (GDP) increased at an annual rate of 2.8 percent in the second quarter of 2024, according to the "advance" estimate. In the first quarter, real GDP increased 1.4 percent. The increase in the second quarter primarily reflected increases in consumer spending, inventory investment, and business investment.”
Once again, the Atlanta Fed’s GDPNow Q2 forecast at 2.6% was closer to the advance estimate than the Blue Chip consensus 1.8% – see below:
