As June 2024 concludes, the U.S. economy witnesses a significant cooling in inflation, marking its slowest pace in three years. The U.S. Consumer Price Index (CPI) rose by only 3.1% year-over-year in June 2024, a substantial deceleration that is stirring optimism across financial markets. This tempered inflation is invigorating a broadening stock market rally, extending beyond the celebrated Magnificent 7 Big Tech stocks.
When stripping out the volatile food and energy sectors, the U.S. core CPI saw a modest increase of just 0.2% in June. This indicator suggests a softening inflationary trend, paving the way for U.S. stocks to sustain and expand their rally throughout 2024 and into 2025. Notably, the S&P 500 has already surged approximately 15% as we approach the halfway mark of 2024, underscoring robust investor sentiment.
Despite the Federal Reserve’s recent decision to maintain key interest rates at their current levels (with the Fed funds rate ranging between 5.25% and 5.5%), several economic indicators suggest potential rate cuts by the year’s end. Recent weaker GDP data and rising unemployment rates add to the case for monetary easing. Additionally, June’s figures reveal a 2% drop in energy inflation and a slight 0.1% increase in food prices, reinforcing the narrative of a slowing economy.

A significant decline in U.S. home construction, marking its largest drop since 2020, coupled with reports of weakening consumer spending and lower inflation figures (both CPI and PPI), further signals economic softening. This broader economic downturn increases the likelihood of Fed rate cuts aimed at stimulating the U.S. economy. Lower interest rates translate into a reduced discount rate applied to future earnings of tech and growth stocks, enhancing the present value of their future earnings and cash flows.

Excluding the Magnificent 7 from the S&P 500’s price-to-earnings (P/E) ratio reveals a compelling valuation of just 16 times future earnings, indicating that the index is attractively priced. This environment sets the stage for broader market participation, encouraging investors to look beyond the dominant tech giants.

Our HAN-GINS Tech Megatrend ETF exemplifies this potential, trading at a relatively low P/E ratio just below 20. The ETF, which includes 120 leading companies driving the fourth industrial revolution, is well-positioned to benefit from a potential uptick in valuations. Reflecting this optimism, our ETF has gained 4% since early May, gaining positive traction among investors.

Anticipated Fed rate cuts serve as a tailwind for the broader tech sector, particularly amid a backdrop of lower inflation. This scenario is expected to boost future gains for tech-focused funds such as ITEK. Currently, ITEK’s valuations remain at a substantial 50% discount compared to the Nasdaq 100 Index, based on key ratios like Price/Earnings, Price/Book, and Price/Sales, according to Morningstar. This discount underscores the potential for significant appreciation as market conditions evolve.

As interest rates begin to decline, the appeal of money market rates diminishes. With over $6 trillion temporarily parked in U.S. money markets, we anticipate substantial capital flows back into U.S. equities throughout 2024 and 2025, as investors seek higher returns. This reallocation of funds is likely to further fuel the stock market rally, broadening it beyond the tech sector to include a wider array of industries.

In conclusion, the cooling of U.S. inflation heralds a promising phase for the stock market, encouraging a broad-based rally that extends beyond the tech titans. With the Federal Reserve poised to potentially lower interest rates, the investment landscape is set for significant shifts. Investors should remain vigilant, positioning their portfolios to capitalize on these emerging trends, with diversified holdings that capture the breadth of the market’s potential. The current environment presents a unique opportunity to reassess and strategically adjust investment strategies to harness the anticipated growth and momentum in the broader U.S. equity market.


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