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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a jittery, volatile week, and for once the story was not stocks or earnings but the bond market. Surging long-term Treasury yields dominated the action, swinging stocks around all week before a strong Friday finish salvaged the tone.
The core issue was a sharp climb in longer-dated yields, with the 30-year Treasury hitting a fresh 19-year high above 5.3% midweek. The driver was a combination of stubborn inflation worries and growing anxiety about the sheer size of government debt. This matters for our readers because rising long-term yields push up borrowing costs across the economy and weigh most heavily on the rate-sensitive smaller companies that had just hit record highs the week before. An important nuance: these are long-term yields climbing on debt and inflation concerns, somewhat separate from the Fed, where the market still expects no rate hikes. That distinction is central to what is pressuring stocks right now.
The government tried to step in. Midweek, the Treasury announced a plan to ramp up its buybacks of longer-dated bonds in an effort to push yields back down, which sparked a relief rally. But the effect proved short-lived, as yields resumed climbing the very next day, a sign that the underlying pressure is not easily fixed.
Retail earnings were the other focus, and they came in decidedly mixed. A major big-box bellwether reported its slowest sales growth in more than six years and fell sharply, raising real questions about the health of the consumer. Meanwhile, off-price and discount retailers beat expectations and rallied. The message is that households are pinching pennies and trading down, which favors value-oriented names, a useful signal for stock picking in the current environment.
Oil stayed elevated near the mid-$80s as the standoff over the Strait of Hormuz dragged on, adding to the inflation anxiety feeding the bond market.
The week ended on a genuinely encouraging note. Friday brought a broad rally, with the S&P 500 and the small-cap Russell 2000 both jumping, after data showed U.S. business activity growing at its fastest pace in more than four years. That is a reassuring sign the economy remains healthy even with yields elevated.
The bottom line: a choppy week driven entirely by the bond market, but a strong Friday finish. For small caps, surging long-term yields were the clear headwind, and the direction of those yields is now the single most important variable to watch.
What's Coming Next Week
Next week is packed. The most closely watched AI chipmaker in the market reports Wednesday, and after this week's chip selloff, its results and guidance amount to a referendum on the entire AI trade. That report alone could set the tone for the broader market.
The same day brings the July reading of the Fed's preferred inflation gauge, along with a second look at second-quarter economic growth. A cool inflation number would help calm the bond market and relieve pressure on smaller companies, while a hot one would add fuel to the yield surge.
Late in the week, the Federal Reserve's annual Jackson Hole symposium takes center stage. It is the Fed chair's first at the helm, and investors will parse his keynote for any signal on how the central bank views the recent spike in long-term yields and the path for rates ahead. Consumer confidence data early in the week adds another read on households.
Above all, watch long-term Treasury yields. After hitting multi-decade highs this week, whether they stabilize or keep rising is the key factor for rate-sensitive small caps, and oil remains the wildcard underneath it all.
The bottom line heading into next week: a make-or-break tech earnings report, key inflation data, and Jackson Hole all land at once. Small caps enter with Friday's momentum but remain at the mercy of the bond market.
We will keep you updated with new opportunities as they emerge.
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SmallCapStocks Team
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