Investors are now betting on an economic expansion
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For Wall Street, the worst-case scenario is in the rearview mirror. Investors now believe lower interest rates are imminent, tariffs are survivable, and consumers can keep spending as long as unemployment doesn't spike.
Why it matters: Investors are betting on an economic expansion, which could lead to market gains that are much broader than just Big Tech.
What they're saying: "Liberation Day happened, and everybody froze…then, incrementally starting on April 8th, with…the series of (tariff) deals, then the One Big Beautiful Bill, you've unfrozen, and the economy is reaccelerating," Steve Chiavarone, deputy chief investment officer of equities at Federated Hermes, tells Axios.
Between the lines: The idea that the market rally is just getting started is based on a belief that the economic data is on an upswing and that interest rate cuts will fuel additional growth.
- Sharp downward revisions to recent job market data took the spotlight by pointing to weakness, but Chiavarone says that even with those revisions, the labor market is still growing.
- Other economic data points, he notes, indicate a recovery, including an uptick in ADP private payrolls, a downturn in initial jobless claims, and a recovery in earnings growth.
Zoom in: Investor bets already support the idea of an economic recovery, with cyclical corners of the market catching bids last week.
- Citi's cyclical versus defensive index rallied 130 basis points last week.
- Cyclical corners of the market also rallied, with materials up 1.8%, transport up 2.8% and regional banks up 2.6% on the week.
- The equal-weighted S&P 500, which treats both large and small members the same, outperformed the broader market by over 2%.
Zoom out: Rate-sensitive names that are cyclically tied will be the winners within this macro backdrop, Chiavarone says.
- Dividend payers and small-cap companies could turn out to be the beneficiaries of a lower cost of capital spurred by interest rate cuts.
- And by sector, transports, materials, semiconductors, biotech, industrial equipment not related to tech capex and consumer names that are a little more speculative could benefit from any economic expansion to come.
Yes, but: "Powell can kill this later this week," Chiavarone says, referring to Federal Reserve chair Jerome Powell's planned remarks at the central bank conference in Jackson Hole this Friday. And any uptick in unemployment could debunk the idea that the economy is set to expand.
The bottom line: Interest rate cuts could come just as the worst headwinds have been removed or priced in for corporate America.
- That would be bullish for the market, especially for cyclically-tied stocks.
