Wentz Weekly: Small Caps Drive Market Rally After Powell Speech

Wentz Weekly Insights
Small Caps Drive Market Rally Last Week After Powell Jackson Hole Speech

Stocks ended up finishing higher last week, measured by the S&P 500, but it was quite a mixed week. The index rose for the third consecutive week however, the Nasdaq was lower and saw its first loss in three weeks as the momentum in growth and technology names faded. Small caps shined with a 3.30% gain for the Russell 2000 index, the best week since July, which outperformed the S&P 500 by over 3% and the first outperformance by small caps in what has felt like a long time.

But small caps still have a lot of catching up to do compared to large cap stocks. Raymond James noted the Russell 2000 has gone 986 days without trading at a record high, making it the second longest streak in history. Most of this is because earnings growth has not been as strong as large caps, but that is expected to reverse over the next couple years. In addition, small caps are benefiting from the expectation for rate cuts.

The first half of the week saw a big rotation within growth and momentum investments that have performed so well since the April lows of the year. Goldman Sachs noted that since a peak on August 11, a basket of high beta momentum names has fallen 13% with most of it coming the first half of last week.

There has not been a specific reason for the quick selloff, but as FactSet notes most are blaming the stretched valuations, renewed concerns about a bubble within AI related stocks, AI competition headwinds, Meta restructuring its AI divisions for the fourth time (and halting hiring for AI jobs), and lackluster monetization for most (MIT released a study saying 95% of companies surveyed said they get no return on AI investments). But in our opinion it is the above factors along with a fatigued market and the need for a rotation with value names and small caps significantly underperforming versus growth, large caps, and momentum this year.

The week had many retailers report there earnings results and as was the case for most the earnings season, results were mixed, but overall better than expected highlighting the resiliency of the US consumer. The other concern going into last week with retailers was the tariff impact. For the most part, companies have apparently been able to mitigate most the impact from tariffs, however cost pressures are expected to accelerate in the second half of the year and going into 2026.

When it comes to the consumer, retailers have not seen consumers pull back spending because of tariffs specifically, but did note lower-income households have traded down and have become more price conscious.

The other big highlight came at the end of the week Friday with a keynote speech by Federal Reserve Chairman Jerome Powell at the annual Jackson Hole economic Symposium. By time the markets closed Friday, the S&P 500 had gained 1.52%, snapping a 5-day losing streak, while the Russell 2000 was up 3.86% on the day.

The remarks from Chairman Powell leaned more dovish, and is what the markets celebrated. The most notable remarks came when Powell said how balance of risks were shifting and that may warrant adjusting policy (cutting interest rates). More specifically, he noted the downside risks to employment are increasing, possibly making the comments in response to the disappointing labor market data from earlier this month. He also commented how tighter immigration has led to a big slowdown in labor force growth.

On the other hand, he noted price pressures to consumers from tariffs are clearly visible. But the markets also appreciated hearing him say the base case is to assume the tariff effects to consumer prices will be short lived. Low inflation a deteriorating labor market would almost certainly mean lower interest rates.

After the comments the market odds of a rate cut at the September meeting shot back up over 90%. What Powell did was open the door to rate cuts to begin, however did not confirm that was a sure thing.

Next on the calendar is one of the most important earnings reports of the quarter with the largest company in the world Nvidia reporting its financial results after the market close Wednesday. In addition, the Fed’s preferred inflation reading, the PCE price index is released for July along with consumer spending and income figures. We expect a lower reading would drive the continued rally in small caps while a higher reading would produce a pause in the rally and reduce rate cut expectations.

Recent Economic Data

• Housing Market Index: The housing market index, an index of home builder confidence, fell back to the worst levels of the year in the August survey, dropping one point to an index level of 32 for this month. The index components remained at depressed levels – the present sales index fell one point to 35, the lowest of the year, the expectation for sales over the next six months was unchanged at 43, while the index for traffic of prospective buyers rose slightly to 22, up from 20 which was the lowest of the year. The Midwest has seen the highest confidence among builders with the West and South seeing the lowest confidence.

• Housing Starts & Permits: The number of housing starts in July were at a seasonally adjusted annualized rate of 1.428 million, which is 5.2% above the rate from June. The pace of housing starts is 12.9% above the level from the same month a year ago but remains relatively low from a historical perspective. The number of permits for a new home build have been trending in the wrong direction, at 1.354 million annualized in July which was down 2.8% in the month and down 5.7% from a year ago. Outside the brief drop during the pandemic lockdowns, it is the lowest rate of permits since 2019. Another not so welcoming figure is the number of homes under construction continues to drop, at 1.357 million in July was 12.4% below the level from a year ago at a time when the economy is dealing with housing shortages still.

• Existing Home Sales: Existing home sales increased 2.0% in July to a seasonally adjusted annualized rate of 4.010 million. The number of existing home sales have been pretty weak since 2023 and are basically unchanged compared to a year ago. The obvious issue is affordability along with inventory of homes available for purchase. However, that has slowly been improving. The amount of existing homes up for sale was up slightly in July and up 16% over the past year to 1.55 million units. On the other hand, price increases have slowed substantially – the median sales price was up only 0.2% over the past year to $422,400 and the report notes “near-zero growth in home prices suggests that roughly half the country is experiencing price reductions.”

• Jobless Claims: The number of jobless claims the week ended August 16 was 235,000, an increase of 11,000 from the prior week. The four-week average rose 4,500 to 221,750. The number of continuing claims was 1.972 million, increasing 30,000 from the prior week for the highest number of continuing claims since early November 2021. The four-week average increased 6,500 to 1.955 million.

Company News

• Nvidia: Nvidia is reportedly developing a new AI chip for China that will be more powerful than the current H20 chip. However, it was noted by Reuters the new chip would still be half as powerful as Nvidia’s most advanced chip the B300 Blackwell GPU. The H20 is the chip Nvidia developed specifically for China to get around export restrictions as it is restricted from selling its most advanced B300 AI chip to China.

• Novo Nordisk: Novo Nordisk shares moved higher after it received FDA clearance for the use of its weight loss drug Wegovy to treat liver disease. It also said it entered into a collaboration with GoodRx to provide its GLP-1 type 2 diabetes and weight loss drugs Ozempic and Wegovy for $499/month for self-pay customers.

• Intel: Shares of Intel were higher after it was announced SoftBank will make a $2 billion investment in the company, paying $23/share via a definitive securities purchase agreement, making it a stakeholder of slightly less than 2%. It was also reported by Bloomberg that the US government is currently in talks to take a 10% stake in the company with funding coming from part of the CHIPS Act. The government cites national security concerns, due to the fact well over 90% of the chips used are produced in Taiwan.

• Robinhood: The Fintech and online brokerage platform company Robinhood announced it will launch a new prediction market for NFL and college football, allowing customers to trade on the outcomes of the NFL and college football games on the Robinhood app. In its most recent earnings call, the company said it is seeing customers’ strongest engagement in sports wagers and sees sports betting as a big opportunity.

• Hertz: Hertz said in a news release it has entered into a pact with Amazon and Amazon Autos where shoppers can browse, finance, and purchase from a selection of pre-owned Hertz vehicles on Amazon Autos. Amazon launched the Amazon Autos business last December and as of now the pact is only available in select cities, and it would allow customers to pickup the purchased vehicles at the Hertz locations.

Other News:

• White House Meeting: The US hosted European leaders at the White House last Monday, following Trump’s meeting with Putin on Friday, attempting to help end the Russia/Ukraine war, and reports say Trump proposed security guarantees for Ukraine in exchange for a peace deal (Ukraine to agree to peace, but it would likely involve surrendering some of its land Russia invaded and currently occupies).

• Effective Tariff Rate: The credit rating agency Fitch said it estimates the effective tariff rate for all imports to the US is 16%, down from its prior estimate a couple weeks ago of 17%, reflecting a marked increase in imports from Canada and Mexico that are classified as USMCA compliant and tariff free. The rate is up from about 3.5% prior to the Trump Administration tariffs. 

WFG News

Economic & Market Outlook Meeting:

Please note that due to unforeseen circumstances, we had to make the decision to postpone our Economic and Market Outlook meetings indefinitely. We will send along updates as they become available.