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Thursday was a rough day for hedge funds heavily invested in megacap tech stocks and shorting the rest of the market. A cooler-than-expected June consumer-price index (CPI) reading ignited a rotation into previously neglected sectors. “Hedge funds are blowing up today,” said Jay Hatfield, CEO of Infrastructure Capital Advisers, referring to strategies that involve long positions in large-cap tech stocks and short bets against small- and mid-cap stocks. While this strategy had been profitable during a rally led by a select group of tech giants in 2024, the tide turned abruptly. Small-cap stocks surged, with the Russell 2000 index up 3.6%, while the Nasdaq Composite fell 2%. This marked the biggest one-day outperformance for the Russell over the Nasdaq since records began in 1986, according to Dow Jones Market Data. The key question for investors is whether this rotation is temporary or the beginning of a broader rally, following a period of concentrated market leadership. Market analysts noted sharp rises in heavily shorted stocks, indicating the squeeze could persist for some time. On Thursday, the S&P 500 pulled back 0.9% after hitting a record intraday high, while the Dow Jones Industrial Average gained 0.1%. The consumer-price index fell 0.1% in June, slowing the year-over-year rate to 3%. The core rate, excluding energy and food costs, rose 0.1%, slowing to 3.3% from 3.4%. Economists warn that more data will be needed to ensure a September rate cut by the Federal Reserve, but fed-funds futures traders now see a better than 90% probability of at least a quarter-point reduction, according to the CME FedWatch Tool. The Magnificent Seven megacap tech stocks, which had led the rally since October 2022 due to AI enthusiasm, were each down at least 2% by midday Thursday. This resulted in a market cap drop of more than $500 billion, the largest single-day loss since September 13, 2022. Despite the decline in heavyweight tech stocks dragging down the S&P 500, around 80% of the index’s stocks were higher on the day. The equal-weighted S&P 500 outperformed its market-cap-weighted version by around 1.8 percentage points, marking the biggest relative gain since January 2021. Hatfield, also the portfolio manager of the InfraCap Small Cap Income ETF, sees potential for the rally to broaden as the market anticipates continued cooling inflation readings and eventual Fed rate cuts. He expects the overall market to extend its run, having recently raised his year-end target for the S&P 500 to 6,000. A September rate cut by the Fed could continue a trend of global central banks injecting liquidity into the banking system, historically boosting both stocks and bonds. Although the S&P 500’s pullback Thursday was exacerbated by the tech selloff, Sonu Varghese, global macroeconomic strategist at Carson Group, believes it won’t be a lasting drag on the index. He anticipates that large-cap value stocks could rally and support the index’s forward momentum, even if tech consolidates. John PaulJohn Paul is the founder of DayTradeToWin, a trading education and software company established in 2008, supporting traders worldwide. His expertise focuses on price action-based futures trading strategies and structured market analysis. DayTradeToWin delivers trading education, indicators, and software tools designed to help traders apply disciplined, rule-based decision-making across global futures markets. He is the creator of multiple trading methodologies, including the Sonic System, Atlas Line, and Trade Scalper, which help traders identify structured opportunities in markets such as the E-mini S&P 500 (ES), Nasdaq (NQ), crude oil (CL), and gold (GC). Official website: https://daytradetowin.com daytradetowin.com

The upcoming election could fundamentally change the inflation outlook for the next three to four years, according to an inflation trader. While many investors and traders are optimistic about cooling U.S. inflation ahead of Thursday’s consumer-price index for June, Wall Street is concerned about the potential inflationary impacts of a second Trump presidency. Before the CPI report, there are conflicting views on the future of U.S. inflation, complicating the Federal Reserve’s analysis of the appropriate path for interest rates, which remain at 23-year highs of 5.25% to 5.5%. Major U.S. stock indexes closed mostly higher on Tuesday, sending the S&P 500 and Nasdaq Composite to record closes despite a selloff in U.S. government debt that pushed up 10- and 30-year Treasury yields for the first time in five sessions. One perspective is that inflation will likely continue easing as U.S. growth slows, allowing the Federal Reserve to cut interest rates as soon as September. Economists expect the annual headline CPI inflation rate to fall to 3.1% in June from 3.3% in May, with inflation traders predicting a drop to 2% by May 2025. Another perspective suggests that inflation could rise again if Trump is re-elected due to his trade and immigration proposals. Parts of the market have expressed concern about Trump 2.0, as seen in a two-day rise in Treasury yields on June 28 and July 1, despite four months remaining before Americans vote. “For good reasons, traders link Trump’s policy agenda with inflation,” said Thierry Wizman, a global FX and rates strategist at Macquarie. “They see policy rates being higher than otherwise under Trump 2.0.” Trump leads President Joe Biden in polls nearly two weeks after their June 27 debate, drawing attention to his proposals for 10% duties on all imports and minimum 60% tariffs on Chinese goods. Biden has also faced criticism for the U.S. inflation run-up that began in 2021, following his Covid-relief plan that added $1.9 trillion in federal spending. Goldman Sachs’ chief economist Jan Hatzius recently stated that Trump’s 10% tariff proposal could trigger reciprocal actions by other countries, potentially raising U.S. inflation by 1.1 percentage points and leading to five extra quarter-point rate hikes by the Fed. Additionally, Deutsche Bank strategist Steven Zeng highlighted the impact of Trump’s immigration policies on U.S. interest rates. He noted that increased immigration flows have acted as a positive supply shock, aiding the Fed in cutting rates, and that reversing these flows could lead to higher wage inflation and a more hawkish Fed stance. After Fed Chairman Jerome Powell’s congressional testimony on Tuesday, fed-funds futures traders priced in a 70% chance of a quarter-point rate cut by September. However, inflation trader Gang Hu of WinShore Capital Partners in New York doubts any rate cuts will occur in 2024. He emphasized that the outcome of the November 5 presidential election could drastically change everything, necessitating careful consideration by the Fed. “Right now, it’s all about Trump. That’s the major theme and the Fed cannot ignore the possible election results at all,” Hu said. “It’s about an election that can fundamentally change the inflation picture for the next three to four years, and parts of the market are already worrying about that picture.” The Fed’s role in controlling inflation means policymakers will likely consider Trump’s tariff proposals and immigration reforms, given their potential impact on the labor market and inflation. On Tuesday, Powell avoided discussing Trump’s tariff plans directly and instead highlighted the persistent nature of inflation after the 1970s and the current era’s supply and demand shocks from the post-Covid reopening of the U.S. economy. “The Fed is absolutely not going to go anywhere near Trump’s policies by talking about them,” said economist Derek Tang of Monetary Policy Analytics. He suggested that the Fed will use uncertain forecasts as a reason to avoid addressing Trump-related risks ahead of the November election. Tang predicted that the Fed might start easing rates by September or December but could reverse course if needed, potentially confusing investors. John PaulJohn Paul is the founder of DayTradeToWin, a trading education and software company established in 2008, supporting traders worldwide. His expertise focuses on price action-based futures trading strategies and structured market analysis. DayTradeToWin delivers trading education, indicators, and software tools designed to help traders apply disciplined, rule-based decision-making across global futures markets. He is the creator of multiple trading methodologies, including the Sonic System, Atlas Line, and Trade Scalper, which help traders identify structured opportunities in markets such as the E-mini S&P 500 (ES), Nasdaq (NQ), crude oil (CL), and gold (GC). Official website: https://daytradetowin.com daytradetowin.com

A softer-than-expected inflation report could pressure the Federal Reserve to signal an interest rate cut is likely in September, or even open the door to one later this month. Thursday’s inflation report is anticipated to be a key event for U.S. markets in a busy week that also includes the start of the second-quarter corporate earnings season, several Treasury debt auctions, and potential developments in the presidential election race. The June consumer price index (CPI) numbers could have significant market implications, with investors particularly focused on this month’s data as it may influence the timing of the Federal Reserve’s first interest-rate cut. A smaller-than-expected rise in inflation could encourage Fed Chair Jerome Powell to prepare the market for a rate cut at the Fed’s September meeting. Some analysts believe that a sufficiently weak number could even prompt a rate cut within weeks, despite futures-market traders viewing this as unlikely, according to CME Group data. Conversely, a higher-than-expected reading, deemed unlikely by most economists, could halt the stock-market rally. Tom Lee of Fundstrat and Neil Dutta of Renaissance Macro warned that Wall Street might be underestimating the possibility of a cut at the Fed’s July meeting. Lee suggested that another soft inflation reading could make a July cut possible, while Dutta noted that the chances of a July cut have been underpriced, arguing that the Fed should cut rates soon to avoid a more severe economic downturn. If Thursday’s CPI data undershoot expectations, stocks are likely to rally alongside bonds as Treasury yields continue their recent decline. CPI data releases have typically caused notable stock market reactions since the Fed started raising rates in early 2022. This year, stocks have seen an average move of 0.9% on CPI days, nearly twice the S&P 500’s daily average move of 0.5%. Any indication that the Fed might cut rates could boost lagging sectors of the market, such as small caps and interest-rate-sensitive stocks like those in the real-estate sector. Real estate has been the worst-performing S&P 500 sector over the past year, while the small-cap Russell 2000 index has moved slightly lower since the start of 2024. Joseph Gaffoglio, president of Mutual of America Capital Management, suggested that a Fed rate cut could broaden market gains, although he doesn’t expect a cut soon and sees one cut later this year as more likely. Economists polled by The Wall Street Journal expect headline inflation to slow to 3.1% year-over-year in June from 3.3% in May, with core inflation expected to remain steady at 3.4%. Friday’s jobs data added weight to Dutta’s argument for a sooner rate cut, showing the labor market cooling with the unemployment rate at its highest since late 2021 and slower wage growth. Despite over 200,000 new jobs, revisions to prior months’ numbers brought the three-month average down. Recent data indicate the economy is buckling under the highest interest rates in over 20 years. GDP growth in the first quarter was 1.4%, with the Atlanta Fed estimating 1.5% for the second quarter, down from 3.4% in the fourth quarter. Powell acknowledged that earlier inflationary fears had passed and the U.S. economy is back on a disinflation path, but stated inflation may not reach the Fed’s 2% target until late 2025 or 2026. The Fed remains divided on how much more evidence of slowing inflation is needed, and whether a soft June report will be enough is yet to be seen. Stocks rose on Friday as traders bet that the latest data would make a September Fed rate cut more likely. The S&P 500 gained 30.17 points, or 0.5%, to finish at 5,567.19, the Nasdaq Composite rose by 164.46 points, or 0.9%, to 18,352.76, and the Dow Jones Industrial Average gained 67.87 points, or 0.2%, to 39,375.87. John PaulJohn Paul is the founder of DayTradeToWin, a trading education and software company established in 2008, supporting traders worldwide. His expertise focuses on price action-based futures trading strategies and structured market analysis. DayTradeToWin delivers trading education, indicators, and software tools designed to help traders apply disciplined, rule-based decision-making across global futures markets. He is the creator of multiple trading methodologies, including the Sonic System, Atlas Line, and Trade Scalper, which help traders identify structured opportunities in markets such as the E-mini S&P 500 (ES), Nasdaq (NQ), crude oil (CL), and gold (GC). Official website: https://daytradetowin.com daytradetowin.com