Wall Street’s Great Rotation Resurfaces After GDP: Markets Wrap

(Bloomberg) — Wall Street traders betting the Federal Reserve will be able to engineer a soft landing spurred a rally in riskier corners of the market, with stocks rebounding after a selloff that jolted markets around the globe.

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Economically sensitive shares such as financial and industrial companies led gains on Thursday. Smaller firms extended this month’s surge to almost 10%, largely outpacing the group of tech megacaps. An equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — beat the US equity benchmark. That index is less sensitive to gains from the biggest companies — providing a glimpse of hope the rally will broaden out.

Even though the pace of US growth picked up, the latest figures represented a moderation from last year. That bodes well for the Fed, which is trying to tame inflation without breaking the economy. The report suggested officials will be able to slash rates in September, bolstering the outlook for Corporate America. Many traders said the report was also a “sigh of relief” because it did not signal the Fed would need to rush — as that could indicate fear of a recession.

“Goldilocks is getting stronger and the risk of stagflation is fading,” said David Russell at TradeStation. “There’s not much ‘stag; and not much ‘flation’. This kind of GDP report is a potential tailwind for corporate earnings that keeps us on pace for lower rates going forward.”

The S&P 500 rose to around 5,450. The Russell 2000 of small companies climbed 2%, while a gauge of the “Magnificent Seven” megacaps barely budged. Treasury 10-year yields declined five basis points to 4.23%.

“The US economy is much stronger than people realize and to the extent that markets were worried about a growth slowdown, they should breathe a sigh of relief after this morning’s GDP number,” said Chris Zaccarelli at Independent Advisor Alliance. “The recent pullback in stocks will likely prove to be a buying opportunity.”

To Matt Peron at Janus Henderson Investors, Thursday’s economic figures do “lend support to the soft-landing narrative” adding that the report “should provide some relief to stressed markets”.

“The catch-up trade in smaller stocks should still have room to run,” said Yung-Yu Ma at BMO Wealth Management. “Earnings growth among smaller companies is set to improve by year end, and the Fed will soon begin a year-long rate cutting campaign which will disproportionately benefit smaller companies.”

Corporate Highlights:

Meta Platforms Inc. is facing its first European Union fine over allegations it abused its dominance in the classified ad market by tying Facebook Marketplace to its social network.
American Airlines Group Inc. cut its earnings outlook as it works to bounce back from earlier blunders that will weigh on revenue and profits for the rest of 2024.
New York Community Bancorp reported provisions for loan losses higher than every analyst’s estimate.
Harley-Davidson Inc.’s second-quarter revenue exceeded analysts’ estimates on higher shipments and better sales of pricier motorcycles in North America. It also announced a $1 billion share buyback.
International Business Machines Corp. reported a jump in bookings for its artificial intelligence business as customers work to implement the latest technology.
Ford Motor Co. shares had their worst drop in four years after a big earnings miss that the automaker blamed on a surge in warranty repair costs for older vehicles.