Market’s Rate Cut Revival

Fresh news and strategies for traders. SPY Trader episode #1267. Hello, market adventurers! This is Buck Bouncer, your guide through the financial jungle, and you're tuned into the Spy Trader podcast. It's 12 pm on Thursday, June 26th, 2025, Pacific time, and we've got a lot to unpack from today's market action.The US stock market is showing some pretty positive vibes today, with the major indices marching higher. The S&P 500 Index is up a solid 1.11%, hitting 6,092.18 and eyeing that alltime high of 6,144 from February. The Dow Jones Industrial Average has gained 1.19% to 43,089.02, and the Nasdaq 100 is up 0.98% at 19,637.60, having recently set its own new high. However, let's remember that yesterday, market breadth was a bit narrower, with the S&P 500 equalweight index actually falling 0.7% even as the broader S&P 500 stayed flat.When we look at sectors today, most are in the green, which is great to see. The Materials sector is leading the pack, up 1.12%, closely followed by Energy, gaining 1.22%. Real estate is the outlier, currently down 0.88%. Technology, especially chip stocks, continues to be a big story, fueled by strong earnings. Interestingly, over the past year, the Industrials sector has quietly outpaced Technology, rising over 18% compared to Tech's 7%, showing a broader market strength beyond just the big tech names. Consumer Discretionary, on the other hand, is still down 3.14% yeartodate.Now for some of the key news items moving the markets. Earnings season is always a big driver, and Micron Technology delivered strong results and an upbeat outlook, which significantly boosted chip stocks and reinforced that ongoing Artificial Intelligence trend, with their data center revenue more than doubling. Worthington Steel also saw a sharp increase after beating its earnings estimates. We're keeping an eye on Nike, which is scheduled to report earnings after the market closes today. However, not all tech news was rosy, as Apple's stock slipped a bit after a price target downgrade by JPMorgan Chase.On the political front, there's some interesting speculation brewing. Reports suggest that former President Trump might name his nominee for the next Federal Reserve Chair early, potentially aiming for someone who could advocate for a more dovish monetary policy and earlier interest rate cuts. This speculation is certainly adding to the market's optimism.Geopolitical tensions have also seen some welcome deescalation, with a ceasefire agreement between Israel and Iran contributing to a calmer market environment. However, investors are also keeping a watchful eye on some upcoming deadlines: the July 4 budget deadline and the July 9 tariff deadline, which could introduce new uncertainties.Let's dive into the economic picture, which is quite a mixed bag and really feeds into the interest rate cut narrative. The final government estimate for firstquarter 2025 Gross Domestic Product, or GDP, showed an unexpected contraction of 0.5% on an annualized basis. This was revised down from an earlier estimate of minus 0.2% and is a stark contrast to the 2.4% growth we saw in the fourth quarter of 2024. This weakness was partly attributed to heavy imports ahead of tariffs.On the labor front, weekly initial jobless claims actually fell to 236,000, which was below expectations. But here's the catch: continuing claims rose to a new threeyear high of 1.974 million. This suggests that while fewer people are filing initial claims, it's becoming harder for those who are unemployed to find new jobs, which indicates some underlying weakening in the labor market.In contrast, May's durable goods orders saw a surprising jump of 16.4%, with the more closely watched core number rising 1.7%, a sharp rebound from April's 1.5% decline.When it comes to inflation and interest rates, the inflation rate in May was reported at 2.4%, slightly up from April's 2.3%. The current interest rate stands at 4.5%. We've seen Treasury yields tick down 3 to 4 basis points today. Market participants are increasingly betting on Federal Reserve rate cuts, with nearly a 90% chance of at least one cut by September, and futures pricing in two to three cuts by yearend.Finally, the Conference Board Leading Economic Index for the US declined by 0.1% in May 2025, after a 1.4% decline in April. The sixmonth growth rate of the LEI has become more negative, triggering what they call a recession signal, although The Conference Board itself doesn't anticipate a full recession, but rather a significant slowdown in economic growth for 2025.So, here's my take, folks. The market's current uplift seems primarily driven by that optimism around potential Fed rate cuts and some genuinely strong individual company performances, especially in the technology sector. The recent downward revision of Q1 GDP and that rise in continuing jobless claims suggest a softening economy. This paradoxically fuels hopes for earlier rate cuts, as the Fed might feel more compelled to stimulate growth. The strength we're seeing in sectors like Materials and Energy could be a reaction to commodity prices, with copper and Brent crude seeing slight increases.However, that negative breadth we saw yesterday, where the equalweight S&P 500 underperformed its marketcapweighted counterpart, indicates that the rally is still pretty concentrated in a few largecap stocks rather than being a broadbased market enthusiasm. And let's not forget those looming tariff deadlines; they could certainly introduce some volatility if trade tensions reescalate, even with the current deescalation of Middle East fears.Alright, let's talk about what this means for your portfolio. Given these market dynamics, here are a few considerations to keep in mind.First, you absolutely need to monitor Fed commentary and all upcoming economic data closely. The prospect of interest rate cuts is a huge driver right now. Any further indications from Fed officials or significant shifts in data, like the PCE inflation report coming out tomorrow, could heavily influence market direction. Be prepared for some volatility around those announcements.Second, evaluate your portfolio's breadth. The fact that the S&P 500 Equal Weight Index is lagging suggests that market gains are still concentrated in just a few largecap stocks. So, consider diversifying your portfolio beyond just these top performers to ensure broader market exposure and potentially reduce concentration risk.Third, consider sectors with strong tailwinds. Technology, especially anything related to AI, continues to show strong performance, as evidenced by Micron. Continued innovation and demand for AI infrastructure could keep this sector robust. Industrials have shown impressive performance over the past year, even outpacing tech. Look for companies with strong backlogs and exposure to reshoring or infrastructure spending. And given today's strong performance and the potential for commodity price appreciation, Materials and Energy might offer opportunities, but remember, energy prices can be quite volatile.Fourth, exercise caution in cyclical consumer sectors. The Consumer Discretionary sector is down yeartodate, and the downward revision in Q1 GDP, partly due to lower consumer spending, suggests a cautious approach. While a rebound is expected in Q2, closely monitor consumer confidence and spending patterns.Fifth, always assess the risk from geopolitical and trade issues. While Middle East tensions have eased, those upcoming tariff deadlines are still a concern. Companies with significant international exposure or those reliant on complex global supply chains could be vulnerable to renewed trade frictions.Sixth, focus on companies with strong fundamentals. In a mixed economic environment like this, companies with solid balance sheets, consistent earnings, and competitive advantages are always better positioned to weather any potential downturns. The recent positive earnings from Micron and Worthington Steel really highlight the importance of companyspecific performance.And finally, maintain a longterm perspective. Despite shortterm fluctuations and mixed signals, the S&P 500 is still nearing alltime highs. For longterm investors, maintaining a diversified portfolio aligned with your personal risk tolerance remains crucial, rather than reacting to every daily market swing.That's all for this edition of Spy Trader! Until next time, stay smart and keep those investments humming!