The S&P 500 slipped from its record high as investors moved away from tech giants like Nvidia, Microsoft, and Meta. The trigger?
The lowest consumer price index (CPI) reading in over three years, which pushed rates down and redirected investor interest to small caps and housin-related stocks.
The S&P 500 dropped 0.8%, stepping back from its earlier session record. The Nasdaq Composite also dipped 1.7% after hitting a new high.
In contrast, the Dow Jones Industrial Average nudged up 21 points, or 0.05%. Nvidia, despite its 159% rise this year, fell 5%.
Small-cap stocks soared, with the Russell 2000 Index climbing 3.3%, fueled by hopes for a Federal Reserve rate cut in September and a smooth economic landing post-inflation data.
Joseph Cusick, senior vice president at Calamos Investments, observed, “It has been less of a divided market and more of a one-sided market for too long, by too few. The market has been very complacent, as represented by the implied volatility at lows and realized volatility in single digits, a contrarians’ red flag. The cooler-than-expected CPI print has nudged this market; now, let’s see what earnings will do.”
Housing stocks like Home Depot and D.R. Horton surged on hopes that lower rates might revive the housing market. Industrial stocks, including Caterpillar, also saw gains.
The CPI dipped 0.1% in June from May, dropping the annual inflation rate to 3%. Economists had anticipated a 0.1% monthly rise and a 3.1% annual rate.
Core CPI, excluding food and energy, recorded a 3.3% annual rate, also below expectations.
Treasury yields fell as traders increased their bets on interest rate cuts.
The probability of a September rate cut rose to about 93%, according to the CME FedWatch Tool, following the CPI data. Traders still expect the Fed to hold steady at its upcoming meeting.
Peter Boockvar, chief investment officer at Bleakley Financial Group, remarked, “Today’s market action is reflective of how far we’ve stretched the rubber band between the top few stocks we all know and everything else. If there is an area of the market that needs rate cuts, it’s small and medium-sized business owners who have suffered the most because of the higher cost of capital.”
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