Inflation and interest rate cuts: Recent economic data indicates a cooling trend in inflation, with the Federal Reserve’s preferred measure showing a slight increase of just 0.1% from May to June. Core inflation, which excludes volatile food and energy prices, rose by 0.2%. These numbers suggest that inflation pressures are easing, potentially paving the way for the Fed to consider cutting interest rates as soon as September.

The U.S. economy continues to expand at a solid rate, with a reported growth rate of 2.8% in the second quarter. This economic growth, alongside a resilient job market and increasing consumer spending, hints at the “soft landing” scenario the Fed has been looking for. 

Q2 corporate earnings and small cap outperformance: The second quarter earnings season has been largely positive, with a significant majority of the S&P 500 companies reporting earnings that exceeded expectations. Interestingly, while mega-cap tech stocks, often referred to as the “Magnificent 7,” saw some declines, smaller companies, particularly small-cap stocks, have outperformed. This shift indicates a market rotation towards smaller-cap equities, which have gained momentum in recent weeks.

Key sectors, including industrials and communication services, have been instrumental in driving earnings growth. The broader market sentiment remains optimistic, bolstered by steady GDP growth and favorable earnings reports.

Looking ahead: The potential for the Fed to implement rate cuts later this year could provide further support to the market. However, the upcoming monthly jobs report will be crucial in assessing the labor market’s health, which is a key factor in economic stability.