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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 milestone week for the part of the market our readers care about most. Small caps stole the show, with the Russell 2000 notching a fresh record high on Friday to cap the week, while the S&P 500 cleared 7,800 for the first time ever. After a summer of the rally being carried by a handful of mega-cap tech names, this is exactly the broadening we have been tracking, and it finally pushed smaller companies to new highs.
The catalyst was Wednesday's July inflation report, which came in reassuringly tame. Consumer prices rose just 0.1% for the month, pulling the annual rate down to 3.4% from 3.5% in June, with core inflation also easing, both in line with expectations. This marked the second straight month of moderating inflation, a sign that the energy-driven spike from earlier this year is genuinely cooling. Stocks climbed and Treasury yields fell on the news, and traders trimmed the odds of a September rate hike to around 42%. Coming right after last week's weak jobs report, the cool inflation reading cemented the growing view that the Fed has no need to raise rates, which is a powerful tailwind for the rate-sensitive smaller companies that led this week.
The setup for small caps is now the most favorable it has been in months. Falling inflation and a softening labor market have pushed rate hike fears off the table, and lower rate expectations benefit smaller, more indebted companies more than almost anyone else. That dynamic showed up all week, with small caps outperforming even on the choppier days early on.
There were two things to keep an eye on. First, inflation at 3.4% is still running above wage growth of about 3.2%, meaning households continue to feel squeezed even as the trend improves. Second, oil ticked back up toward the month's highs, with the international benchmark touching near $90, as uncertainty around the Middle East resurfaced and the Strait of Hormuz remained effectively closed. That is the main risk to the cooling inflation story, since a sustained rise in energy prices could undo the recent progress.
The bottom line: cooling inflation, a Fed on hold, and a broadening rally drove small caps to record highs. It was a genuinely strong week, and the backdrop for smaller companies looks as constructive as it has all year, provided oil behaves.
What's Coming Next Week
The spotlight shifts to the consumer. The big-box retailers report earnings across Tuesday through Thursday, offering the clearest read yet on how households are holding up. This matters because inflation is still outpacing wage growth, and elevated fuel costs are squeezing both shoppers and retailers themselves. Strong results would reassure investors that spending is resilient, while weak guidance would raise concerns about the health of the consumer heading into the fall.
The Federal Reserve's July meeting minutes are also due Wednesday. With markets having now priced out a September hike, investors will comb through them for any clues about how divided policymakers are and whether the door is opening to eventual rate cuts. Any dovish signal would be another lift for smaller companies.
Housing data and regional manufacturing surveys round out the calendar, and oil remains the key wildcard underneath it all. This week's rally leaned on cooling inflation, so any renewed spike in energy prices would be the main threat to the momentum.
The bottom line heading into next week: retail earnings and the Fed minutes are the events to watch. Small caps enter the week at record highs with real momentum, and as long as the consumer holds up and oil stays contained, the broadening rally has room to continue.
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SmallCapStocks Team
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