Seismic Shift in the Stock Market: Russell 2000 Surges, Homebuilders Strong
The stock market experienced a seismic shift early this month, with the Russell 2000 surging by over 11% in just a week. This surge is seen as a reflection of the breadth and power of the overall stock market. Market pundits believe that this shift is in anticipation of multiple key interest rate cuts by the Federal Reserve. These rate cuts are expected to provide a boost to domestic stocks, particularly benefiting smaller companies in the Russell 2000 index. In contrast, larger multinational stocks that dominate the S&P 500 may not see the same level of growth.
One piece of evidence supporting this theory is the strength of the homebuilders sector. Homebuilders have been performing exceptionally well, especially after fixed-rate mortgages declined to a median rate of 6.87%, the lowest level since March. This decline indicates that the impending interest rate cuts by the Fed could provide a new “turbo boost” to the U.S. stock market and economy later this summer.
Semiconductor Stocks Hit by Profit-Taking, but Taiwan Semiconductor Shows Promise
However, last Wednesday, semiconductor stocks faced a setback due to profit-taking and concerns about potential trade restrictions under the Trump administration. The market was worried about the impact these restrictions could have on semiconductor companies. Fortunately, Taiwan Semiconductor, a major player in the industry, brought some positive news on Thursday. The company reported a 40% increase in second-quarter sales, surpassing analyst estimates of a 35.5% increase. This growth rate is the fastest pace seen since 2022.
Of particular significance is Taiwan Semiconductor’s sales of high-performance computing chips used in Artificial Intelligence (AI), which rose by an impressive 52% in the second quarter. This success suggests that not only can Taiwan Semiconductor re-ignite the semiconductor industry, but it can also drive growth in a range of AI-related stocks.
Earnings Announcement Season Begins: Each Stock Stands on Its Own Merits
As the earnings announcement season kicks off, it is important to remember that each stock will stand on its own merits. Many tech companies will be making announcements this week, and their individual performances will shape market sentiment.
Microsoft’s Security Challenges and API Restrictions
Microsoft has faced challenges in enhancing the security of its Windows 365 operating system due to a 2009 agreement with the European Commission. The agreement requires Microsoft to share its application programming interface (API) for Windows Client and Server operating systems with third-party security software developers. This openness, however, has recently been under scrutiny. The recent CrowdStrike software upgrade glitch that crashed cloud servers worldwide highlighted the risks associated with such openness.
Interestingly, Apple has been restricting developers’ access to its operating system API since 2020, while Google is not bound by similar API regulations. Despite the clear security benefits of having control over its operating system, it is unlikely that the EU will grant Microsoft permission to restrict certain developer access to its API and reverse its 2009 agreement without intense lobbying efforts.
Anticipated Market News: Durable Goods and PCE
This week, the most anticipated market news will be the release of durable goods data on Thursday and the Personal Consumption Expenditure (PCE) report on Friday. The PCE announcement is expected to be very positive, potentially leading to a dovish Federal Market Open Committee (FOMC) statement by the Federal Reserve on July 31st. Such a statement would likely have a positive impact on the stock market, setting the stage for a strong start in August.
Uncertainty Surrounding the Democratic National Convention
The upcoming Democratic National Convention (DNC) in Chicago is expected to be historic. President Biden has endorsed Kamala Harris as his replacement, but it remains uncertain whether the DNC Super Delegates will accept her or call for a more energetic candidate. While the Harris campaign has announced that they have a majority of delegates to secure the nomination at the DNC, the 400+ Super Delegates, who hold significant power, could sway the outcome. If Harris continues to poll poorly against Trump, her chances of winning the majority of the powerful DNC Super Delegates remain uncertain.
Impact of Israel’s Gaza Operations on Kamala Harris’ Support
Israeli Prime Minister Benjamin Netanyahu’s visit to Washington D.C. this week highlighted the strained relationship between Israel and the Biden Administration. The disagreements over Israel’s Gaza operations have reached a new low, and this could potentially hurt Kamala Harris with Jewish voters. Since Israel is the most important U.S. ally in the Middle East, the spat with the Biden Administration may affect Harris’ support among this key demographic.
Silicon Valley Warming Up to Trump/Vance Ticket
Surprisingly, Silicon Valley is showing signs of warming up to the Trump/Vance ticket. Elon Musk’s endorsement of Trump after his assassination attempt and Mark Zuckerberg’s positive reaction to Trump’s immediate response may have contributed to this shift. Additionally, the fact that J.D. Vance, Trump’s chosen Vice President, has worked for Silicon Valley elites like Peter Thiel adds to his appeal. Silicon Valley’s growing support for Trump/Vance can be attributed to their perception that the Trump administration did not aggressively pursue legal action against big technology companies like Amazon and Apple, unlike the Biden administration.
Stalled Onshoring of Battery Plants
The onshoring of battery plants in the U.S. has hit a roadblock due to a combination of factors. Donald Trump’s desire to end the electric vehicle (EV) mandate to save struggling Big 3 automakers, coupled with a glut of cheap LFP batteries from China, has slowed down the construction of battery plants. LG Energy Solution, a major battery manufacturer, is scaling back its plans for a third battery plant in Michigan. Similarly, SK On, a South Korean battery manufacturer, declared a substantial quarterly loss and is unlikely to proceed with the construction of additional battery plants in the U.S. These setbacks can be attributed to the global battery glut and the possibility of a Trump administration.
Impending Rate Cuts and Pro-Business Mandate
In conclusion, the stock market is experiencing significant momentum due to strong earnings, improving market breadth, and the expectation of dovish policies from the Federal Reserve. The author suggests that if they were running the Fed, they would implement key interest rate cuts on July 31st and September 18th. However, it is more likely that the Fed will issue a dovish FOMC statement on July 31st, setting the stage for an interest rate cut in September. Furthermore, it is anticipated that another rate cut will occur on November 7th after the November Presidential election. These rate cuts are expected to act as a “turbo boost” for the stock market, propelling it to new heights. With an anticipated overwhelming electoral college victory, Donald Trump will likely have a pro-business mandate that will further support the surge in the stock market, leading to robust economic growth in 2025 and beyond.
