Interest Rate Cut Expectations and Market Impact - Treasury Secretary suggests the Fed should cut rates by 50 basis points next month, with an ultimate reduction of 150 to 175 basis points [1] - Small cap Russell 2000 saw the biggest gains, indicating potential rebound in out-of-favor groups and sectors if rates drop [2] - Market had previously priced in six rate cuts for 2025, but the S&P was significantly lower at that time [3] - Lower rates could benefit commercial real estate, which has been hurt by higher rates [6] - Lower rates lead to higher multiples and stock prices due to discounted cash flow [6] Labor Market and Economic Growth - Treasury Secretary's reasons for rate cuts include a softening job market [3] - There's a contradiction in the administration's stance on the job market revisions [4] - Unemployment is at 42%, higher than last year's below 4% [10] - GDP growth in the first half of 2024 was approximately 125% [10] - Tariffs of 15% or 30% on imports, especially from China, could weigh on growth [11] Investment Strategies - Equities are expected to continue to rally in a 150 basis point cut environment [14] - A barbell strategy is suggested, focusing on high multiple tech stocks and value stocks [14] - Financials and healthcare sectors are identified as potential areas for investment [15]

Investment Strategy - Piper Sandler focuses on stocks outside the tech sector with similar attributes, such as high earnings growth, profitability, and strong balance sheets [2] - The recipe for outperformance lies in companies with strong fundamentals, applicable across market caps [2] - Diversification is key, rather than concentrating investments in a few mega-cap stocks [6] - Investing in the most profitable names across all 11 sectors has outperformed the tech sector in recent years [5] Tech Sector Analysis - The tech sector offers multiple avenues for outperformance [5] - Discrepancies exist in performance among different groups within tech, such as software and semiconductors [3] - The distinction between hardware and software remains relevant, especially concerning AI disruption [4] Macroeconomic Factors - Scale provides companies with advantages like better access to capital and cost management [8] - Small caps have recently outperformed due to market pricing in interest rate cuts [8] - Small cap sales estimates are still falling, suggesting the outperformance is not due to a broad macro pickup [9]

Inflation and Economic Growth - The data suggests that inflation is not a major concern, with the bigger problem being a lack of real growth [2] - Real GDP growth in the first half of the year is slightly less than 1% annualized, and job creation is up 60 basis points annualized [3] - Current inflation is running at 2.5% to 3% [3] Federal Reserve (Fed) Policy - A Fed rate cut is anticipated, with the expectation that the Fed will choose to ease next month [3] - The market has been narrow in this bull market because the Fed has been tightening [7] - If the Fed cuts the funds rate, long-term bond yields and mortgage rates could decrease, the dollar could weaken, and the money supply could increase, all of which are positive for stocks and the economy [9] - A Fed rate cut could be a game-changer, potentially initiating a new bull market [10] Market Outlook and Investment Strategies - Small caps and midcaps offer a very attractive relative PE discount, trading at more than 30% discounts to their average 20-year relative PE with the S&P 500 [12][13] - Historically, 12 months after the Fed starts cutting interest rates, large caps gain less than 4%, while small caps are up about 3%, indicating significant room for small caps to move [13] - If the Fed eases, leadership may broaden out to small caps, international value plays [11]

Market Sentiment & Strategy - 314 Research downgraded equities in July after being overweight since May, citing stretched sentiment and a seasonally weak period [1][2][3] - The firm suggests neutralizing overweight positions and letting the market come to them, especially for clients who followed their previous advice [7] - The analysis indicates a potential pause in the market, advising caution despite positive sentiment [6] Systematic Factors & Technicals - Systematic buyers, including vault targets CTAs and corporate buybacks, supported the market previously, but a seasonal dry period for corporate buybacks is anticipated [3][4] - Technicals and systematics are emphasized for tactical decisions, particularly watching for a pause [6] - Momentum signals that led to an overweight rating in May are still in place, but trees don't grow to the sky [6][7] Economic Concerns & Federal Reserve - Concerns exist regarding the labor market and the growth story, which the market may be overlooking [9] - The Federal Reserve's potential rate cuts are now priced into the market, raising the question of what comes next [8][9] - The federal government running a 7% deficit is seen as a huge support to the market, contributing to wealth creation across various assets [5] Sector Specific Recommendations - The firm is fading small caps, viewing the recent move as a short squeeze against large-cap, high-quality stocks [9][10] - The recommendation is to lessen small cap exposure and potentially short the Russel [10] - The analysis suggests staying long on large-cap, high-quality stocks, considering them a "perpetual motion machine," and underweighting low-quality stocks [11] S&P 500 Target - The firm maintains a $6,800 price target for the S&P 500 at the end of the year [6]

Market Sentiment & Performance - Bank of America's flow data indicates net selling of small-cap stocks by clients last week, while large and mid-cap stocks saw net buying [1] - 44% of fund managers surveyed believe large-cap stocks will outperform small-cap stocks this year, an increase from the previous reading [1] - The Russell 2000 is up only 1.5% year-to-date, indicating continued underperformance of small caps [1] Concerns & Cautions - B of A remains near-term cautious on the Russell 2000 index and does not expect any Fed rate cuts this year [2][4] - Tariff risk poses a greater threat to small caps due to their thinner margins [3] - Inflation remains sticky, leading to the expectation that the Fed will remain on hold, potentially negatively impacting the Russell 2000, which is sensitive to interest rates [4][5] - Small-cap earnings recovery has been slower than expected compared to large caps, with lofty expectations for the second half of the year [6][7] Opportunities & Recommendations - It is advisable to be selective within small caps, favoring mid-caps due to cleaner balance sheets and lower risk from tariffs and refinancing [8] - Despite risks, small caps offer wider performance spreads and alpha opportunities, with relatively cheap valuations compared to large caps [8] - Focus on higher quality areas within small and mid-caps, prioritizing stocks with positive revisions and stronger margins [9][10]

Investment Opportunities - The firm favors growth stocks and small-cap companies, particularly in the healthcare and energy sectors, which have underperformed this year [1] - Within healthcare, medical diagnostics and medical equipment are attractive due to relatively stable earnings growth despite concerns over Medicaid and capex [3] - AI infrastructure, including power, connectivity, and cooling, presents opportunities within small and mid-cap names, driven by hyperscaler capex [5] - Small-cap defense tech companies, especially those in drones, rockets, and motors, are favored over large-cap legacy players due to their nimbleness and superior technology [11][12] Market Trends and Analysis - Healthcare's representation in the S&P 500 has significantly decreased from 16% to 9% in recent years, despite strong earnings growth in the last quarter [2] - Small-cap earnings growth expectations for 2024 did not materialize, but an upward inflection is anticipated in the next quarter and into 2026 [4][5] - S&P 500 companies reported 118% earnings growth, 700 basis points above expectations, but a pullback is possible after earnings season [6] - US oil growth is expected to stagnate and potentially roll over into 2026, which could benefit energy companies by increasing capex, rig count, and frack count [8][9] - Natural gas prices are strong due to data center demand, and natural gas companies with cheap valuations have upside potential if oil rolls over [10] Risk Factors - Headline and political risks affect some healthcare companies, necessitating discerning stock picking [3] - Tariffs and volatility, particularly concerning China, impact small-cap companies, requiring careful stock selection [5] - Energy stocks have underperformed due to lagging oil prices [8]

Investment Opportunity in Women's Sports - Aerial Investments launched Project Level, an investment vehicle focused on women's sports [1] - Women's sports are considered the "small caps" of sports, presenting a significant valuation difference compared to major leagues, creating investment opportunities [1][2] - Data indicates staggering growth in women's sports across various areas, including attendance, participation, and sponsorship [3] Market Trends and Comparisons - High school volleyball has 479,000 girls participating, exceeding boys' participation in soccer or baseball [4] - Investing in volleyball is compared to early investments in the NBA 30 years ago [5] - The current state of women's sports is likened to the NFL 30 years ago, with potential for accelerated growth due to leveraging existing men's sports infrastructure [6] - NFL teams in 1995 sold for almost $200 million each and are now worth $7-8 billion, highlighting the potential for value appreciation in sports investments [6] Future Growth Factors - Women's sports are expected to benefit from double-digit growth correlated to media rights, particularly in streaming [7] - New streaming platforms needing content present opportunities for women's sports [7]

Today's top story, President Trump's reciprocal tariffs taking effect at midnight. Investors continue to talk about the potential impact on inflation and the broader markets. Here's what famed value investor Melody Hobson Hod Hobson, excuse me, told Andrew in Aspen.I think the market has walked a lot off and I think that that's in the hopes of this all uh being rational at some point and taking care of itself. And I think AI has obviously been like rocket fuel in this market and that's helped a lot. Do you ...

Investment Strategy - The industry suggests diversifying portfolios to mitigate the impact of specific stocks, particularly Microsoft and Meta [1][3] - The industry observes small-cap stocks in the US are at their cheapest valuation relative to large-cap stocks since June 2000 [1] - The industry notes small caps have outperformed large caps in the 25 years since 2000 [1] Market Valuation - The industry acknowledges valuation isn't a perfect timing tool but tends to work long term [2] - The S&P 600 is expected to grow more than the S&P 500 in the next 12 months [2] - The S&P 600 trades at 146% times earnings versus 25 or 23 times earnings for the S&P 500 [2]

All right, let's bring in Mike Wilson. He is chief chief investment officer and chief US equity strategist for Morgan Stanley. And and Mike, just on these points, you're not worried about inflation, at least in regards to what it means for the markets. >> Well, that's right. And I mean, we're just going through all these numbers. It's like, you know, alphabet soup, all these different measures of inflation. And so what we do as equity strategists and investors is we look at earnings. Earnings, you know, tel ...