Q2 GDP Growth Fuels Market Optimism Despite Earnings Season Volatility
Q2 GDP Growth Fuels Market Optimism Despite Earnings Season Volatility
By:JJ Kinahan
Small caps are surging as major indices dip. Meanwhile, tech investments in AI are under scrutiny.
The Russell 2000 shines, adding 1.3% amid sector rotation favoring small caps.
Q2 GDP growth at 2.8% supports the Federal Reserve's soft landing strategy.
Upcoming earnings reports from major tech companies will highlight financial impacts of investments in artificial intelligence.
Stocks continue to show mixed results. The S&P 500 fell by 0.5% today while the Nasdaq Composite dropped 0.9%. Over the past two days, the Nasdaq is down over 4.5%, and for the last three days, the S&P is down close to 3%. Meanwhile, the Russell 2000 continues to shine, adding another 1.3%. This reflects a sector rotation favoring small caps for now.
Earnings season is in full swing this week. Despite reports from Alphabet (GOOG) and Tesla (TSLA), most big names will report next week, including Advanced Micro Devices (AMD), Amazon (AMZN), Meta Platforms (META) and Microsoft (MSFT) . I'm keen to hear their thoughts on AI, particularly the financial implications and how they plan to monetize these investments beyond chipmakers.
In the meantime, we have significant macroeconomic data. Yesterday, the latest gross domestic product (GDP) number showed second-quarter growth at an annual rate of 2.8%, stronger than expected and double the first quarter’s growth. While this strong number didn’t dampen hopes for a rate cut in September, it adds evidence of a soft landing orchestrated by the Federal Reserve.
Small cap stocks rule
The strength in small caps, especially in energy and financials, is noteworthy. These sectors are highly sensitive to interest rates. With a near 100% probability of a rate cut in September, small cap stocks, particularly the Russell 2000, have benefited. According to The Wall Street Journal, the Russell 2000 outperformed the S&P 500 by nearly 13% over the past twelve days.
Digging deeper into the GDP report, nonresidential fixed investment and capital expenditures both increased, indicating economic optimism. If a recession is a concern, there is little evidence supporting that fear.
This morning's personal consumption expenditures (PCE) index had a muted effect in premarket trading, aligning with expectations. Core PCE prices were up 2.6% year-over-year and 0.2% month-over-month. Heading into this number, there was a 100% probability of a September rate cut. The market now expects a 54% chance of rates as low as 4.5% by year-end, up from 17% a month ago.
What up right now?
For today, I'm watching large cap and tech stocks. Many investors are questioning whether the market is changing or if it's a buying opportunity. The The CBOE Volatility Index, or VIX, closed yesterday at 18.46, up 2% from Wednesday and nearly 13% since last week. If we see the S&P and Nasdaq rebound today, a fall in volatility would be a confirmation signal.
Finally, the Olympics kick off tonight in Paris. There is something special about the competition and the stories of the competitors. Between market and geopolitical anxieties, maybe we need is a couple of weeks of cheering and excitement. As always, stick with your investing plan and long-term objectives.
JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan
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