“We are now entering a new phase in which preemptive cuts (as opposed to reactive cuts driven by bigger rises in unemployment) can de-risk the forward growth outlook, he noted. “Provided the Fed is not moving too slowly to arrest the underlying weakening of the economy, this de-risking of the forward growth outlook favors market breadth and cyclical sectors.”
One of the biggest questions about the market rotation of the previous session — which notably improved breadth — is whether or not it is a legitimate trend reversal of the last year and half — or yet another head fake, according to Dan Wantrobski at Janney Montgomery Scott.
“We will say at the outset that as far as the technicals are concerned, it cannot be confirmed that yesterday’s action was the beginning of a sustainable longer-term trend,” he noted.
“However, from a trading perspective, we do believe we can continue to see further rotation over the near term, as charts still point to the potential for mean reversion.” One of the highlights of this week is the big rebound in smaller firms — which have largely lagged the broader market and especially big tech names this year.
Quincy Krosby at LPL Financial says the Russell 2000 is viewed as an important barometer of potential interest-rate easing, but also a gauge for economic conditions.
“Historically, the Russell 2000 lags the market for three months following the first rate cut. The Fed normally cuts rates due to concerns about the economy and specifically the labor market,” Krosby noted. “The market would much prefer a rate cut predicated on inflation easing amid a solid economic landscape.”
The next few economic data points, in addition to earnings reports, should help clarify if small-cap performance is completely warranted, she concluded.
“Bulls withstood a barrage of data this week,” said Mark Hackett at Nationwide. “Market momentum remains relentless. Several important hurdles have been cleared, making earnings the next likely market catalyst.”
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