Soft Inflation Data Fuels the Bullish Fire

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Let’s cut straight to the chase. Thanks to this morning’s shocking inflation report, the market is experiencing a massive shift right now. And if you want to make money over the next 12 months, you’ve got to buy the stocks on the right side of this transition.

Indeed, as it turns out, June’s Consumer Price Index (CPI) report was notably soft. Inflation ran lower than expected across the board last month. The headline rate fell all the way to 3%. And consumer prices actually dropped month-over-month for the first time since COVID emerged in early 2020.

That soft inflation report – coupled with the fact that, as of June, the unemployment rate has already ticked above where the Fed thought it would be by the end of the year – all but guarantees that the central bank will start cutting interest rates soon.

Rate-Cut Hopes Are Kickstarting a Shift

Indeed, odds for a September rate cut jumped to 95% today.

So – that means stocks are soaring now, right?

Well, it’s a bit more complicated than that. Some stocks are soaring. Others are not.

Here’s why.

Thus far, the stock market rally of 2024 has been exceptionally narrow due to a lack of investor confidence about the go-forward path on inflation, interest rates and the economy. Therefore, investors have piled into red-hot AI stocks – driving the market averages up – while ignoring pretty much everything else.

But now investors are finally seeing the light at the end of the tunnel, if you will. And this narrow market rally is “broadening.”

After today’s soft inflation report, Wall Street is finally convinced that inflation will fall to 2%, the Fed will cut interest rates and the currently hobbled U.S. economy will improve in the coming months.

As a result, investors are starting to feel like they don’t have to hunker down exclusively in Big Tech and, instead, can start placing bets on other stocks in the market.

That’s why, as of this writing, the ‘Magnificent 7’ tech stocks are down more than 3% today, with AI favorite Nvidia (NVDA) down over 5%. At the same time, the small-cap Russell 2000 index is having its best day of the year, rallying nearly 3.5%.

This shift is what we’re calling the “Great Broadening of 2024.”

The Final Word on Soft Inflation Data’s Impact

We expect that as the Fed shifts into rate-cut mode and the economy regains its strength, this great broadening will continue for the rest of the year.

Small-cap stocks will stage furious catch-up rallies. Large caps will cool off.

And we think that in order to profit from this market shift, you need to be invested in both small- and large-cap stocks for the next several months – with a heavy bias toward smaller stocks (not the Magnificent 7).

But with a market so frenzied, it can be hard to know where to focus your attention.

Learn about a few of our favorite stocks to buy right now.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.