(Bloomberg) — Wall Street traders revived prospects for a half-point Federal Reserve rate cut next week, spurring a rotation into stocks that would benefit the most from policy easing.
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Economically sensitive shares outperformed the group of tech megacaps that have led the bull market, with the Russell 2000 index of smaller firms climbing 2.5%. An equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — beat the US equity benchmark. That gauge is less affected by the biggest companies — providing a glimpse of hope the rally will broaden out.
As the S&P 500 marched from one record to the next in the first half of the year, some investors grew concerned that only a handful of companies were participating in the rally. Corners of the market outside of big tech are now barreling higher as investors grow more confident that the start of the Fed cutting cycle will further fuel Corporate America.
“The biggest news in the last 24 hours has been the shift in odds for a 50 basis-point cut at next week’s Fed meeting,” said Jonathan Krinsky at BTIG. “Small-caps offer better risk/reward in the near-term, and we think mega-cap tech likely sees another breather, although it will certainly participate if the S&P 500 makes new highs.”
The S&P 500 rose 0.7%, up for a fifth consecutive day. Its equal-weighted version gained 1.1%. The Dow Jones Industrial Average advanced 0.9%. The Nasdaq 100 added 0.7%. A gauge of the “Magnificent Seven” megacaps added 0.5%.
Treasury two-year yields dropped seven basis points to 3.57%. The likelihood of a 50-basis-point move climbed to 40% on Friday, up from as low as 4% earlier in the week. The dollar fell. Gold rose to another record.
To Neil Dutta at Renaissance Macro Research, the case for the Fed cutting more agressively next week is strong.
“A popular reason to not go 50 is the message it would send: ‘The Fed must know something the rest of us don’t.’ I don’t buy this for a second,” Dutta says. “My own sense is that markets would…
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