Three Things (7/17)

Rotation to small cap

Investors are extending their rotation from shares of mega-cap tech companies to small-cap stocks. The small-cap index is outperforming the Nasdaq Composite over the last five trading days by around 10 percentage points. Current performance metrics would represent the widest margin of outperformance for the Russell 2000 over the Nasdaq Composite during a five-session period since December 2000 while the S&P 600 small-cap index is also on pace for its highest close since 2022.

The incredible rotation from trends that have worked (Big Tech) towards things that haven’t (small and mid cap stocks) has been unrelenting. Investors are underwriting the idea that interest rate cuts will broaden the economic recovery to the benefit of companies that have been more susceptible to changes in the macro (think: higher borrowing costs, rising costs of goods, etc.). For the trend to continue in earnest, we likely still need to see a true inflection in earnings – we’ve started to see EPS beats are starting to come in higher than large caps and lucky for us, we’re heading into a busy earnings season that can provide us that exact clarity we likely need.

Takeaways from banks

Banks are always some of the first companies to report earnings and we’re well on our way with mixed results. Banks and financial companies are usually strong barometers for the strength of the economy given their access and real time view of the health of corporations and consumers. JPMorgan Chase and Wells Fargo saw their adjusted profits fall, while Citigroup saw sluggish spending on its credit cards. Bank of America topped expectations while Morgan Stanley missed the mark.

The biggest takeaways so far? (1) Investment banking is rebounding: A clearer outlook on interest rates is giving bankers hope that M&A may be emerging from a two-year slowdown. Combine that with a political election that may change the pressures from antitrust cases, expectations are moving back towards historical averages. (2) Asset and wealth management businesses are working: the focus on recurring revenues via fees and the cost synergies from blockbuster M&A (h/t E*Trade and TD Ameritrade) are finally coming through the P&L. (3) Lower end consumers are feeling the pressure: more borrowers are carrying higher balances, some spending is shifting away from nondiscretionary goods, and budgets are under pressure.

Rising cyber attacks

Cyber security breaches are on the rise in 2024 and the latest victim? Disney. Data from Walt Disney's internal Slack workplace have been leaked online, including those related to ad campaigns, studio technology and interview candidates. The Mickey Mouse Factory can be added to a growing list of other major Fortune 100 companies struck by cyber attacks recently: AT&T, UnitedHealth, and even Ticketmaster.

We’re over halfway through 2024, and already this year we have seen some of the biggest, most damaging data breaches in recent history. From huge stores of customers’ personal information getting scraped, stolen and posted online, to reams of medical data covering most people in the United States getting stolen, the worst data breaches of 2024 to date have already surpassed at least 1 billion stolen records. The biggest beneficiaries of the trend? Cyber security providers – some of the most prominent names are up 50%+ year-to-date and will continue to be a focus for CTO’s heading into budgeting decisions for 2025. Software as a complex has been underwhelming to start the year but there are pockets, like cybersecurity, that are flourishing – the ponds in which you’re fishing (or in our case, the areas of the market to which we choose to allocate capital) are vitally important considerations in today’s market environment.

Disclosures:

As of writing, DIS and SCHW are holdings in Titan Flagship.

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