This week, US equity investors are closely monitoring the performance of smaller companies following a robust rally while also keeping an eye on the mega-cap technology sector as quarterly earnings reports commence alongside critical updates on inflation from the Federal Reserve. Notably, the Russell 2000 Index has seen a significant rise of approximately 8% since the start of July.
This surge coincides with a growing expectation of an interest rate cut anticipated in September. According to early assessments from the CME Group's FedWatch Tool, the probability of a 25 basis point reduction in the federal funds rate is nearly 96%, a significant increase from the 60% probability observed just a month ago.
In contrast, last week was challenging for technology stocks, marking them as the worst-performing sector, also trailing for the month. In contrast, financials and real estate emerged as the standout sectors. Investors are particularly interested in determining whether this rotation away from technology will maintain its momentum, particularly as the Q2 earnings season unfolds. Among the key earnings reports expected this week, technology giants like Alphabet, SAP, NXP Semiconductors, and Texas Instruments are on the radar.
In addition, major companies outside the tech sector reporting earnings include Tesla, Visa, Coca-Cola Company, and Colgate-Palmolive Company. So far, over 14% of the S&P 500 companies have reported their Q2 earnings. These earnings have seen an increase of nearly 14% year-over-year, surpassing the FactSet consensus estimate from June 30, which anticipated an 8.8% increase.
The current blended earnings estimate from FactSet, which merges reported results with remaining consensus projections, indicates a potential 9.7% rise in earnings. This suggests results may trend slightly lower but are still expected to surpass quarter-end estimates. Investors will also be paying close attention to the Federal Reserve's preferred core Personal Consumption Expenditures (PCE) measure, which is set to receive a double update this week—the Q2 estimate and possible revisions expected to be announced on Thursday, followed by the June estimate on Friday.
Additionally, the advance estimate for Q2 GDP will also be released this week. Moreover, there is heightened interest in how President Joe Biden's withdrawal from the 2024 US presidential elections will impact the markets moving forward..