Three Things (7/12)

The rotation out of mega-cap

On Thursday the stock market saw a heavy rotation out of mega-cap technology companies and into small and mid caps. The June CPI print surprised to the downside, making lower interest rates palpable and causing the Russell 2000 to soar. The S&P 500 reacted inversely as it ended the day down close to a percent. The winners through the first half of 2024 hold the top spots in the S&P 500 by weighting, which means the largest companies became over-concentrated within the index.

Mega-cap stocks felt like a safe place for investors to hide this year. Mature, less volatile companies with strong profits are attractive during periods of uncertainty, a philosophy that has arguably been cause for overcrowding. That being said, the rotation represents a much needed bid for small caps and a potential reset in mega-cap valuations, as the Magnificent Seven have accounted for 61% of the S&P 500’s returns this year. The shift is a natural one that represents a sigh of relief from investors, and above all, underscores the importance of diversification in a long-term investment portfolio.

June CPI print

The June CPI print dropped 0.1% since May and rose 3.3% year-over-year, which is the first negative inflation print since 2020. Core CPI, which excludes food and energy costs, increased 0.1% versus expectations of a 0.2% monthly increase. The data exceeded expectations across the board and clearly showed the Fed that inflation is slowing down as they hoped.

The Fed has been relentlessly aiming to achieve the second portion of its dual mandate: stable prices. Prior to June, monthly CPI prints have shown that inflation is decelerating at an extremely slow pace, and this print finally solidified investor confidence in an initial interest rate cut in September. The report leads us to believe that continued dovish remarks may be on the horizon, and a path towards lower interest rates may not be as far away as we think.

Delta earnings

Delta kicked off earnings season and reported second-quarter results on Thursday. Although the company posted record quarterly revenue, net income decreased by almost 30% compared to a year earlier. Delta is the most profitable airline in the U.S., but its earnings report showed how inconsistent volume can create challenges for even the ‘best performing’ airlines.

Airlines have recently expanded their capacity to meet demand, but demand hasn’t seemed to keep pace causing airfares, a key revenue driver, to drop 5.1% in June. It’s a balancing act for Delta: they need to maintain an appropriate number of flight options during periods of high demand but still be able to charge airfares that support profitability. The seemingly infinite options for customers has long plagued the airline industry. The perfect balance has yet to be achieved by any one airline – affordable prices, enough flights to serve demand, and customer / reward ecosystems that keep them coming back.

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