August 1, 2024

In the past few weeks investors have experienced the effect of a rotation in the markets where large capitalization stocks had a pullback while small and mid-cap stocks finally experienced a positive jump in performance amounting to almost 9 percent for the July.

Rotations are inevitable and part of the rationale for having a portfolio diversified among various capitalized sectors. The reason is that most investors believe that the Federal Reserve will begin cutting interest rates in September in response to falling inflation and a softer employment market. Interest rate cuts tend to improve the prospects for mid and small companies by lowering borrowing costs and spurring economic activity. Recent economic data is encouraging the Fed to put multiple rate cuts back on the table.

Currently the forward Price/Earnings ratio (P/E) for the S&P 500 is 21.4, above the 5-year average of 19.3, and 10-year average of 17.9.  However, this higher P/E is driven by the Magnificent 7 – Apple, Amazon, Microsoft, Nvidia, Alphabet (Google), Meta (Facebook) and Tesla – which now make up about a third of the index and carry a weighted average P/E of 36.4.  The growth of these stocks has been fueled more by the heightened interest in AI rather than interest rate cuts.

The yield on the 10-year Treasury note stands at 4.15%, and the yield on the two-year Treasury yield is at 4.35%. Year to date all major indices remain positive with the Dow, S&P 500, and NASDAQ at 8.37%, 15.78%, and 17.24%, respectively.

*Disclaimer: This report is a publication of Marchand Faries Financial Management, Inc. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.  All expressions of opinion reflect the judgement of the author as of the date of publication and are subject to change.