Before the bell

Market Highlights

• Inflation Trends: The core consumer price index (CPI) inflation rose by 3.3% in June, the lowest rate since April 2021, suggesting a cooling inflationary environment.

• Federal Reserve Policies: Bond markets reacted to the possibility of two to three Fed rate cuts by year-end, with a potential rate cut as early as September.

• Political Developments: Markets remained calm despite political violence at a presidential rally and the announcement of Senator J.D. Vance as President Trump’s vice-presidential running mate.

• Yield Curve Movements: The Treasury bond yield curve steepened, indicating potential reflationary pressures and market expectations of rate cuts.

Notable Earnings

• Netflix: Netflix delivered better-than-expected earnings for the quarter, driven primarily by a substantial increase in subscriber growth and the success of its ad-supported tier. This new revenue stream helped boost overall income and led to a significant rise in share price. The company’s strategic investments in content and global expansion continued to pay off, positioning it well for future growth despite a competitive streaming market.

• Johnson & Johnson: Johnson & Johnson posted robust earnings that exceeded market expectations, thanks to strong sales in its pharmaceutical division, particularly in oncology and immunology products. The consumer health products segment also performed steadily, contributing to the overall positive results. The company's diversified portfolio and continued innovation in healthcare solutions provided a solid foundation for sustained performance.

• Goldman Sachs: Goldman Sachs reported lower-than-expected earnings, largely due to a significant decline in investment banking revenue amid a quieter M&A environment. However, the firm demonstrated resilience with strong performance in its asset management division, which helped offset some of the losses. The bank's focus on diversifying its revenue streams and managing costs was evident, suggesting a cautious yet optimistic outlook.

• United Airlines: United Airlines reported higher-than-expected earnings, driven by a strong recovery in travel demand, especially in international markets. The airline benefitted from increased passenger traffic and higher load factors, reflecting a rebound in the global travel industry. Cost management strategies and operational efficiencies also played a role in bolstering the bottom line, instilling confidence among investors about the airline's trajectory moving forward.

The graph titled "Relative Performance of Large-cap to Small-cap Stocks" tracks the performance trends of large-cap versus small-cap stocks from January 1, 2024, to early July 2024, with the performance indexed to 100 at the start of the year. The chart shows a period of steady gains for large-cap stocks during the first half of the year, where they consistently outperformed small-cap stocks. This trend of large-cap dominance is particularly pronounced around mid-June 2024, where the index reaches its peak, indicating that large-cap stocks were significantly outperforming their small-cap counterparts.

However, a notable shift occurs shortly thereafter. From late June 2024, the graph displays a sharp reversal in the relative performance, marking the beginning of a new trend where small-cap stocks start to outperform large-cap stocks. This is evidenced by the steep decline in the performance index, which drops rapidly from its peak. This transition could be attributed to various factors such as market rotations, changes in investor sentiment, or economic conditions that favor smaller companies. The pronounced decline suggests that investors were reallocating their investments from large-cap to small-cap stocks, seeking potential growth opportunities in the latter. This dynamic shift highlights the changing market landscape and the importance of diversification across different market capitalizations.

Outlook Snapshot: The Week Ahead

Looking ahead, the markets are set to navigate a landscape shaped by the earnings season hitting full stride, with around 30% of S&P 500 companies expected to report. Key earnings from giants like Tesla, Visa, and Alphabet will be scrutinized for insights into broader economic trends and sectoral health. Additionally, the release of the core personal consumption expenditures (PCE) price index will be pivotal, potentially confirming the cooling inflation trend and influencing Federal Reserve policy decisions. Investors will also keep a close eye on evolving political developments and their market implications. With the backdrop of a resilient yet cautious market sentiment, any pullbacks might present buying opportunities, especially in the context of expected Fed rate cuts and improving economic indicators. The combination of these factors could set the stage for a dynamic week ahead, full of potential market-moving events and strategic investment opportunities.