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Good Morning!
Before we jump in, a quick reminder that we have new stock alerts coming next week. Keep an eye on your inbox.
Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a holiday-shortened week that told an encouraging story for the broader market, even as the headline economic data looked soft on the surface. The two big themes were a weak jobs report that markets actually welcomed, and a continued rotation out of red-hot technology and into the rest of the market. That rotation is worth paying close attention to, because it is exactly the kind of shift that tends to favor smaller companies and the average stock over a narrow handful of mega-cap names.
The most important release was Thursday's June jobs report, and it came in notably weak. The economy added just 57,000 jobs in June, roughly half of what economists had expected, and prior months were revised lower. Normally that would spook investors, but the reaction was the opposite, and for good reason. The unemployment rate actually ticked down to 4.2%, and wage growth stayed contained, painting the picture of a labor market that is cooling gradually rather than cracking. Some are calling it a Goldilocks report, not too hot and not too cold. The key takeaway is that a softer labor market, combined with the recent collapse in energy prices, gives the Federal Reserve room to be patient rather than rushing toward the rate hikes markets had been fearing. Fed Chair Kevin Warsh reinforced that tone this week, noting that inflation risks have come down as energy prices have fallen significantly.
The rotation story was the other headline, and it is the one most relevant to our universe of small-cap names. After a monster run in the second quarter, semiconductors and the big AI-linked names came under heavy selling pressure, with the chip sector falling sharply as investors took profits. Money did not leave the market though. It rotated. The Dow closed at a fresh all-time high on Thursday even as the tech-heavy Nasdaq slipped, a clear sign that investors are broadening out beyond the crowded AI trade. This improvement in market breadth was already showing up in June, which was a much stronger month for smaller companies as market leadership began to shift. A healthier, broader market is generally good news for the kind of overlooked small- and mid-cap names that get left behind when only a few giants are driving the indexes.
Zooming out, the second quarter as a whole was the best for the major indexes since 2020, driven largely by the tech surge in April and May despite the backdrop of the Iran war. The fact that leadership is now rotating rather than the whole market rolling over is a constructive sign heading into the second half of the year.
On the energy front, oil continued its steady decline, which remains the single most important tailwind for inflation. U.S. crude fell to around $68 per barrel this week, down nearly 20% over the past two weeks and back to roughly where it sat before the war began. That drop has not fully worked its way into the inflation data yet, which is why the coming months could bring real relief on prices.
The Iran situation stayed in focus but leaned positive. After a brief exchange of fire near the Strait of Hormuz early in the week, U.S. and Iranian officials resumed talks in Doha through mediators, with Trump saying progress was being made and traffic through the strait continuing to pick up. No final peace agreement is in place, but the direction of travel is encouraging, and that is what is keeping oil low.
The bottom line on the week: a soft jobs report gave the Fed breathing room, oil kept falling, and the market broadened out beyond big tech. For small-cap investors, the improving breadth and rotating leadership are the developments to watch. The holiday-shortened week was choppy for small caps day to day, but the underlying setup is moving in a favorable direction.
What's Coming Next Week
The marquee event is Wednesday's release of the minutes from the Fed's June meeting. This was the first meeting under Kevin Warsh, and since he broke with tradition by declining to submit his own rate projection, the minutes are Wall Street's best window into how divided the committee really is and where policy is headed. With the market now leaning toward the Fed staying patient after this week's soft jobs data, any hawkish surprise in the minutes could jolt sentiment, while a more balanced tone would support the recent broadening in the market.
Beyond the minutes, the economic calendar is light coming out of the long holiday weekend, which could leave more room for individual stock stories and the ongoing rotation to drive the action. That kind of environment, with fewer big macro distractions, often gives smaller names more room to move on their own catalysts.
Looking a little further ahead, second-quarter earnings season is just around the corner, ramping up in the back half of July. Expectations are high, with analysts forecasting strong double-digit profit growth for the broad market, so the early reports will set the tone for whether those expectations are justified.
Finally, keep watching oil and the Iran talks. Continued de-escalation and a durable reopening of the Strait of Hormuz would cement the falling-inflation story and could take Fed rate hikes off the table entirely, a scenario that would be broadly supportive of risk assets, including small caps. Any breakdown in talks that sends oil back up would be the main risk to that outlook.
The bottom line heading into next week: the Fed minutes are the key catalyst, the data calendar is quiet, and the rotation into the broader market is the trend to watch. With energy prices falling and market breadth improving, the setup for smaller companies is looking more constructive than it has in months.
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SmallCapStocks Team
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