Last week, the equal-weighted S&P 500 index led its market-capitalization-weighted big brother, a sign that the market dynamic has turned optimistic. US and European stock indices are stunningly bullish. They have definitely earned their second week of gains! This new financial landscape is changing every minute. Now, all eyes are on the next economic data releases and the Federal Reserve’s subsequent actions—more so now with the recent trade developments between the United States and China.
The equal-weighted S&P 500 just blew the doors off, leaving its market-cap-weighted sibling in the dust. This is a trend that’s recent, just going back a month—with both indices generally following each other’s trajectory closely. Investors are quickly recognizing this divergence. Either of these explanations would be great news—it would mean that more investors are looking to smaller companies in the wider market. Investor confidence in the economic recovery has grown strongly. This transition represents a premature prioritization of smaller, newer companies vs. larger, incumbent firms.
Market Performance
During all of last week, US and European stock indices continued to push higher. Nobody is more bullish than the investors. This change in mood is largely based on happy development that the US-China trade relations seem to have steadied. Major indices closed with small gains, stoking optimism for a soft landing.
Things were looking bright under this expectation, but there were surprises on the foreign currency front. This has caused the dollar to become one of the weakest currencies across G10 FX space. This decline is unfortunate enough, but what’s worse is its effects on international trade and investment. Over the last month, bond yields have been pretty steady. This relative stability is a sign that investors are showing deliberate discipline as they move through the complexities of today’s financial market.
The strong recent performance of the equal-weighted S&P 500 indicates an underlying market rotation. Often viewed as an index traditionally led by large-cap stocks, its recent surge implies a resurgent rotation toward smaller companies. Investors have returned to both sectors with a more tempered outlook, with hopes that will create a more equal playing field between the two industries in the future.
Trade Developments
The yearlong trade war between the US and China has significantly cooled off, helping boost a positive market mood. The yearlong trade truce that started in early October eliminated the uncertainties that for months had weighed heavily on both economies. Recent data indicates that US trade tariffs are having diminishing effects on Chinese trade data, signaling a potential stabilization in bilateral trade relations.
Last month, China announced a record-breaking trade surplus to further underscore its impressive export strength. Particularly impacted were exports to the European Union, reflecting the surprising strength of China’s export market even amidst a war in Ukraine and other geopolitical headwinds. At the same time, US demand for Chinese exports has held steady, indicating that American consumers are still using more and more Chinese products.
This is largely why the Trump administration’s efforts to hamstring China’s export juggernaut have failed spectacularly. Analysts are attentively watching the changing tides of trade. They are particularly keen to spot any changes that come from further negotiation or changes in policy. The thaw in trade relations would create the potential for increased economic cooperation between the two countries.
Focus on Upcoming Economic Data
As the Federal Reserve looks ahead to its next meeting, all eyes will again be on key economic indicators. This week, we see the release of some important data on US job openings and measures of costs to employ. Investors and analysts will scrutinize these figures for insights into the health of the labor market and broader economic conditions.
The 2-year Treasury yield has remained essentially flat over the past month, reflecting a cautious stance among investors amid mixed economic signals. Bond yields have remained surprisingly steady. Market participants are more attuned than ever to how forthcoming economic data might affect Federal Reserve policies and interest rate decisions.
Market analysts anticipate that any shifts in employment costs or job openings could significantly impact the Fed’s approach to monetary policy. As central bank officials prepare for the coming round of discussions about interest rate changes. At the same time, market participants will be watching how these releases fit with the broader narrative on inflation and growth.