Inflation Data Sparks Market Chaos: Tech Stocks Tumble, Small Caps Soar, Rate Cut Expectations Rise

Tech Stocks Tumble As Small Caps, REITs, Gold Miners Rally; Soft June Inflation Ignites Rate Cut Expectations: What’s Driving Markets Thursday?

A surprising turn of events in the financial markets unfolded on Thursday as a lower-than-expected inflation report for June sent shockwaves through various asset classes. The annual inflation rate slowed to 3%, below the predicted 3.1%, with the monthly reading showing the first contraction in four years at -0.1%. This unexpected data sparked a rush among traders to adjust their expectations for Federal Reserve rate cuts, with the odds of a September rate cut now standing at 92%.

The market reaction was swift and dramatic, with large-cap indices such as the S&P 500 and the Nasdaq 100 falling by 0.9% and 2.1% respectively. This drop, particularly in the tech-heavy Nasdaq 100, marked its worst daily performance of 2024. It appears that market participants had already priced in the rate cut expectations into tech stock valuations, leading to a rotation from top-performing sectors to laggards.

Conversely, assets sensitive to high interest rates saw significant gains. Small caps, represented by the iShares Russell 2000 ETF (IWM), surged 3.3%, marking its strongest one-day return since mid-December 2023. Gold and long-dated Treasury bonds also rallied, with the VanEck Gold Miners ETF (GDX) climbing 2.4%.

The real estate sector outperformed tech stocks by more than 5 percentage points, signaling a potential sectoral shift. Homebuilders, regional banks, and gold miners all saw notable growth as investors reacted to the prospects of lower interest rates.

In terms of individual stock movements, Tesla Inc. (TSLA) fell over 6% following reports of delays in the Robitaxi project. On the other hand, top-performers within the real estate sector included Communications Corporation (SBA) and Alexandria Real Estate Equities, Inc. (ARE), both up 6.5%.

PepsiCo Inc. (PEP) saw a 0.4% increase after reporting quarterly earnings, while Delta Air Lines Inc. (DAL) and ConAgra Brands Inc. (CAG) reacted differently to their earnings reports.

Overall, the market dynamics on Thursday were driven by the unexpected inflation data, which fueled expectations of a rate cut in September. This led to a reshuffling of assets, with tech stocks tumbling while small caps, real estate, and gold miners rallied. The performance of various sectors and individual stocks reflected the shifting sentiment among investors as they positioned themselves for potential changes in monetary policy.

As the market continues to digest the implications of the inflation report, investors will be closely monitoring upcoming economic data and Fed statements for further clues on the direction of interest rates and its impact on different asset classes.