The market advanced modestly this week and was led by rotation into smaller-cap and cyclical names. The S&P 500 rose 0.9%, the Nasdaq Composite gained 0.8%, and the DJIA outperformed with a 1.7% advance. Mid- and small-cap stocks led the way, with the S&P Mid Cap 400 climbing 1.6% and the Russell 2000 surging 3.1%, signaling renewed risk-on sentiment following the July CPI report.<\/p>\n\n\n\n
The CPI data, largely in line with expectations, provided the initial spark for this week\u2019s rally. Total CPI increased 0.2% month-over-month (in-line with consensus), while core CPI, which excludes food and energy, rose 0.3% month-over-month (in-line with consensus). These readings kept year-over-year headline inflation at 2.7% and core inflation at 3.1%. This gave markets confidence in the likelihood of a 25-basis-point rate cut at the September FOMC meeting and fueled a rotation toward cyclical and small-cap stocks poised to benefit from lower interest rates.<\/p>\n\n\n\n
The rotation was particularly evident in the homebuilder stocks, with the iShares U.S. Home Construction ETF posting a substantial 5.6% gain for the week. Consumer discretionary also saw notable momentum, up 2.5% for the week, reflecting optimism around lower borrowing costs and ongoing consumer demand. Health care continued to outperform, advancing 4.6% WTD, led by UnitedHealth and Eli Lilly, while communication services (+2.1%) and materials (+1.8%) also contributed positively. Mega-caps and semiconductors saw modest gains.<\/p>\n\n\n\n
On Thursday, the release of the July PPI report tempered some of the enthusiasm from the CPI-driven rally. The PPI for final demand jumped 0.9% month-over-month (consensus 0.2%), with core PPI also rising 0.9% month-over-month, compared to an unchanged reading in June. These readings pushed year-over-year PPI growth to 3.3% and core PPI to 3.7%, suggesting wholesale inflation pressures remain elevated. In response, markets modestly reduced expectations for the magnitude of the upcoming rate cut, with the probability of a 25-basis-point cut at the September FOMC meeting declining slightly to 84.9% by Friday, down from 99.9% earlier in the week.<\/p>\n\n\n\n
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