The major US equity indexes closed modestly lower for the week after recovering from the biggest sell-off in nearly two years. The S&P 500 Index neared correction territory (down over 10% from its peak) on Monday morning while the Nasdaq was down 15.8% from its peak. Even more pronounced were the swings in the CBOE Volatility Index (VIX) – the fear gauge - which briefly spiked Monday to 65.7, its highest level since late March 2020, before falling back to end the week at 20.6. A recent increase in Japanese short-term interest rates, albeit modest, seemed to result in a partial unwind in the so-called carry trade. A sharp rise in the yen over the preceding few weeks made the trade unprofitable, causing many investors to pull out of their positions. On the macro side, several major companies reported signs of weakening consumer demand during earnings calls.

The major US equities benchmarks closed lower, as investors reacted to the busiest week of the quarterly earnings reporting season and disappointing monthly economic data. Furthermore, the BOJ’s decision to hike rates and turn hawkish after nearly 18 years stunned investors and led to a massive short squeeze. The recent rotation toward value stocks and small-caps stalled, at least in part, as the small-cap Russell 2000 Index pulled back sharply at the end of the week, recording its worst week since March 2023. However, an equal-weighted version of the S&P 500 Index held up better than its market-weighted counterpart, suggesting that the market’s performance continued to broaden away from the so-called Magnificent Seven and other Tech mega-caps.

US stocks recorded mixed returns for the 2nd consecutive week, with small-cap and value shares continuing to outperform large-cap growth stocks that have led the market over much of the year. Indeed, at the close of trading on Thursday, the Nasdaq 100 Index was lagging the broader S&P 500 and barely outperforming the small-cap Russell 2000 Index for the year to date, before large-cap growth shares rebounded to close the week. The week was also notable for the S&P 500 selling off on Wednesday by more than 2% for the first time since February 2023, while the Nasdaq suffered its worst loss since October 2022. micro seemed to take precedence over the macro for much of the week, as investors absorbed one of the busiest weeks of the earnings reporting season.

Stocks were volatile this week with continued rotation in market leadership to small-cap and value shares. U.S. markets initially rallied to new-highs but faded toward week's end, led by weakness in the tech sector. The S&P 500 and Nasdaq closed lower on the week, while the Dow posted a solid gain. Value stocks outpaced growth stocks by 477 basis, as measured by Russell indexes—the largest divergence since March 2023. The week was also notable for a widespread global disruption to computer systems early Friday due to an error in a vendor’s security update to some users of the Microsoft operating system.

US stocks gained in the first notably broad advance since mid-April. The Dow Jones, S&P 500 Index and Nasdaq Composite moved to record intraday highs, but the biggest advance was notched by the small-cap Russell 2000 Index, which gained 6.00%, marking its best week since early November. Value stocks also handily outperformed growth stocks. Q2 earnings season kicked off Friday with releases from JPM, Wells Fargo and Citigroup. The first 2 missed estimates while the latter cut its outlook. A major factor supporting stocks appeared to be Thursday’s release of the US CPI as headline prices fell 0.1% in June, the first decline in 4 years. In the wake of the report, the Russell 2000 Index outperformed the large-cap S&P 500 and the Nasdaq by 209bps and 581bps respectively.

The S&P 500 is up 16% YTD, with the benchmark recording its 4th positive week in the last five as investors bet that any economic weakness later this year will be met with a Fed rate cut. The Nasdaq’s YTD gain is 22%. As measured by Russell 1000 indexes, growth shares outperformed value stocks by 415 basis points over the week, while small & mid caps recorded losses. Expectations for lower interest rates, fed by signs of weakening growth and easing inflation pressures, seemed to remain a major factor in favouring growth stocks. On Monday, the ISM posted its lowest reading of manufacturing activity (48.5) since February. More surprising may have been a sharp downturn in the ISM’s current services sector activity, which plunged from 53.8 in May to 48.8 in June.

Most major U.S. stock indexes posted gains in a light news week during what seemed to be a bit of a lull in market activity ahead of Q2 earnings reports. Small-caps and Tech stocks performed best, with growth style outperforming value. The banking sector performed well as media reports said that the Fed is considering significantly lighter additional capital requirements for banks than regulators originally proposed in the wake of the regional banking crisis in March 2023. This good news was followed by the Fed’s announcement that all 31 of the large U.S. banks they stress tested remained above their minimum capital levels. The main macro number of the week was Core PCE inflation which showed that prices excluding food and energy rose 0.1% from April.

US stocks recorded modest gains over the shortened trading week (markets were closed on Wednesday), with the S&P 500 hitting 5,500 intraday for the 1st time ever. The week also saw modest signs of rotation in the market, with value stocks outperforming growth as Nvidia suffered its first down-week in two months. Friday was a so-called triple-witching day, with roughly USD 5.5 trillion in options related to indexes, stocks and ETFs expiring. The start of the week brought some evidence of US economy easing with retail sales signalling less discretionary spending. But data released later in the week suggested that the economy was stronger than indicated by retail sales.

The major US equity indexes ended mostly higher for the week, with the S&P 500 Index and Nasdaq Composite touching new highs. The market’s advance remained exceptionally narrow for the 2nd consecutive week, however, with an equally weighted version of the S&P 500 trailing its more familiar, capitalization-weighted counterpart by 2.15%. The AI euphoria continues to provide a continuing tailwind to tech-related stocks and growth shares, which outpaced value stocks by the largest margin since March 2023 (461 basis points). Another factor behind growth shares’ outperformance may have been reassuring inflation data and falling bond yields. US headline CPI inflation was flat in May for the first time in nearly two years.

The S&P 500 and Nasdaq Composite indices both reached record intraday highs during the week while small & mid caps pulled back. Growth stocks outpaced value shares by the widest amount since early in the year on the back of falling longer-term interest rates. The start of the week brought some downbeat economic readings (e.g ISM manufacturing below 50.0), which appeared to lead to a return of worries about “stagflation” among some investors. The picture brightened at midweek as the ISM’s services jumped to 53.8 in May, its highest level in nine months. The upside surprise in the official US jobs report on Friday morning didn’t lead to a negative market's reaction as it was tempered by an unexpected rise in the unemployment rate to 4.0%, its highest level since January 2022.