What happened last week
- Global stocks edge higher, led by the US, in a week characterized by slow and sluggish summer sessions
- Regional banks rallied, boosting small caps; trend outperformance of small caps unlikely due to various headwinds
- International stocks lagged with significant weakness out of emerging markets despite China’s auto-market stimulus announcement
What we’re watching this week
- Earnings reports from companies that make up a little under half of the market cap of the S&P 500
- Central bank policy meetings in the US, EU, and Japan: the Fed and the European Central Bank (ECB) are expected to hike by 25 bps, Bank of Japan (BOJ) to extend accommodative policy
- Key US economic data including second-quarter GDP, employment costs, and the Fed’s preferred inflation gauge, the core personal consumption expenditures index (PCE).
Horizon’s Investment Management Views
- In a quiet summer trading week, global stocks nudged higher as domestic equities led international. Year-to-date losers, not mega caps, led last week’s rally in the US. These broader price gains were likely due to short covering and a special index rebalance for the NASDAQ 100, which reduced concentration in top holdings. However, this improved market breadth in the US didn’t reach international markets. Non-US stocks fell modestly, with emerging markets and China, which announced new consumption stimulus, exhibiting considerable weakness.
- Regional banks rallied sharply on better than feared deposit figures, realizing their best weekly gain since May. This price impact likely bled over to small over large caps last week, given the high recent correlation between the two markets. We view a broad-based rally in small caps as unlikely due to headwinds from access to credit for smaller companies and bank profitability fears. We expect this week’s earnings reports from mega-cap technology and Artificial Intelligence names to be another potential driver for continued outperformance by the biggest names in the S&P 500.
- It’s also a big week for macro – the Fed, ECB, and BOJ all meet this week. The market has fully baked in 25 bp hikes by both the Fed and the ECB – don’t expect market volatility unless the pressers deviate wildly from current market pricing. The BOJ wraps up the week on Friday with no expected change to their incredibly accommodative monetary stance, a potential tailwind to Japanese stocks. We also get a first look at 2Q GDP and two important bits of inflation data – core PCE and the employment cost index- and a Politburo meeting in China.
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