AFMC - Game-Changing CPI Report May Drive Big Rotation Towards Value And SmallCap

2024-07-15 08:30:01 ET

Summary

• Following a cooler than expected CPI print, the Russell 2000 had third-best day relative to S&P 500 on record, with SmallCap/Value outperforming Growth.
• Expectation of lower Fed rates are driving SmallCap/Value outperformance, supported also by a strong economic backdrop and low earnings expectations relative to the Mag-7.
• The price action on Thursday 11th June following the CPI report may have been an initial taste of a longer-term trend that extends into 2025.
• At the same time, I like the stark relative valuation differential backdrop of SmallCap/Value vs. LargeCap/Growth which should suggest ample rerating potential.

Following a much cooler than expected CPI print on Thursday 11th, the S&P 500 (SP500) dropped almost 1% day-on-day (DoD). Interestingly, the performance of the Index was almost exclusively driven by the richly valued Magnificent 7 stocks (down more than 3% on average), while the remainder of the index showed positive returns on that day (up more than 1% on average)....

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