Market snapshot: rotation into value stocks and inflation reaction

The US tech sector remains out of the spotlight for the time being, with the rotation into value and smaller-cap stocks gaining pace and traction.

The more traditional Dow Jones index closed at a new record high, bringing its gains in the year to date to 8.7%, as investors sought alternatives to a narrow market rally which has been largely based on AI euphoria.

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Bellwether Caterpillar Inc (NYSE:CAT) continued its strong run over recent days, adding another 4%, while better than expected second-quarter numbers from UnitedHealth Group Inc (NYSE:UNH) lifted the shares by 6.5%.

Elsewhere, banks rose after pleasing numbers from Morgan Stanley (NYSE:MS) and Bank of America Corp (NYSE:BAC), with the latter seeing the benefit of renewed capital market interest feeding through to a rise in fees. Unlike some of its competitors, Bank of America also upped its guidance on net income interest and the shares rallied by more than 5% as a result.

Smaller caps also saw the benefit of strong buying interest, with the Russell 2000 gaining by more than 3% on the day, taking gains over the last week or so in excess of 11%, as the consensus has now moved to a 100% likelihood of an interest rate cut in September. Smaller caps are regarded as being more susceptible to a higher rate environment, based largely on the need to borrow to fund expansion, unlike many of the mega-cap equivalents.

The latest data which could suggest an imminent rate cut came in the form of retail sales, underpinned by a consumer which is estimated to account for around 70% of US economic growth. Sales were unchanged in June and slightly above expectations, leading to the notion that the perfect soft landing could be in sight, with the economy continuing to grow while inflation is also cooling, and without the possibility of tipping into recession. Alongside recent data which has supported an easing of pressure both on inflation and in the labour market, the possibility of an easing rate cycle is looming increasingly large.

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The benchmark S&P 500 index also nudged higher to a fresh record close, despite some minor weakness in mega-cap technology stocks. The index has now risen by 18.8% so far this year, eclipsed only by the tech-heavy Nasdaq which has added 23.3% on the back of the AI trade.

Markets in Asia were mixed, with investors awaiting the outcome of a four-day economic meeting of leaders in China, which finishes tomorrow. Such meetings usually set policy and strategy for the forthcoming decade, and are widely expected to reveal further planned advances in technology.

In the meantime, there was some trepidation in tech stocks across China as well as Taiwan, after comments from Donald Trump suggesting that the latter could be liable for payment to the US for defence, while also sparking a reminder of the previous trade war with the region. Given the increasing possibility of Trump being re-elected as president, relations between China and the US could well continue on what has been a fractious path.

In the UK, the more domestically focused FTSE 250 dipped after the latest release of inflation figures which revealed an unchanged level of 2%, against hopes for a fall to 1.9% which, coupled with the Bank of England’s caution that inflation could tick higher later in the year, threw further doubt on the likelihood of a rate cut in August.

In addition, within the headline figure, inflation for services was much stronger at 5.7%, likely caused by labour shortages and wage growth, putting further pressure on a resistant level of general price increases. The FTSE 250 has, however, had a strong run of late, with the index now ahead by 7.5% so far this year on the back of improving economic prospects and the perception of political stability which is currently eluding certain countries elsewhere.

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The premier index fell slightly in opening exchanges, with the general China malaise overhanging the mining sector, and with Antofagasta (LSE:ANTO) shares additionally shedding almost 4% after downgrading its copper output guidance.

A broker downgrade to Legal & General Group (LSE:LGEN) did little to lift the mood, while another nudge higher in sterling limited progress in the face of the index constituents’ high exposure to overseas earnings.

Even so, the FTSE 100 remains up by 5.5% in the year to date having seen the benefit of achieving almost haven status, as well as renewed interest from international investors given its cheap valuation by historical and global peer standards.