Happy Friday! Yesterday, June CPI came in at 3.0% year-over-year, cooler than expected and the lowest reading in 41 months.

June’s PPI is due this morning, and analysts expect it to rise 2.3% compared to a year ago.

Today’s edition previews earnings season, what happens when a small-cap rotation takes hold, and Big Tech’s Thursday tumble.

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S&P 493 vs. Mag 7

A new and red-hot earnings season has officially kicked off. 

If things pan out as expected, it should help justify the current bull-run that’s pushed the S&P 500 26% higher over the last 12 months.

While Delta’s weaker guidance on Thursday — and subsequent 4% stock drop — was not a great start, the airliner is unlikely to define the trend moving forward.

Analysts expect S&P 500 companies to see 8.8% higher earnings per share compared to a year ago, according to FactSet. 

If that holds, it’d mark the best showing for corporate America since the start of 2022.

What I’m wondering is whether this momentum can last in such a top-heavy market. 

Big banks like JPMorgan and Wells Fargo report earnings today, though the mega-cap stocks aren’t due for another two weeks. Those will be the ones that matter most. 

Remember, the top 10 stocks in the S&P 500 account for 35% of its total market cap.

Household-name tech giants have such a pronounced influence that last week the strategy team at Piper Sandler dropped their index-level coverage of the S&P 500.

Concentration has become so lopsided, in their view, that tracking the entire benchmark no longer provides a clean snapshot of the market.

Indeed, a sizable chunk of tech outperformance can be chalked up to AI hype, which will eventually fizzle. 

As things stand, a record low share of individual S&P 500 stocks are outperforming the index, as illustrated in the chart below from Apollo chief economist Torsten Sløk.

It makes sense to expect investors to rotate into other sectors at some point.

We got a taste of this broadening out on Thursday, and it took place at the expense of the wider market. After June CPI came in cooler than expected, Nvidia, Meta, and Tesla all tumbled 5.6%, 4.1%, and 8.4%, respectively. 

The Magnificent 7 together saw a combined $600 billion of market cap wiped out.

Another wild stat: It was the 9th worst day for the index, but the 10th best day for market breadth, according to Bespoke.

The typical stock, meanwhile, did just fine. Invesco’s Equal-Weight S&P 500 ETF finished the day 1.4% in the green and the small-cap Russell 2000 closed 3.7% higher.

There were signs of this shift earlier in the first quarter, too. Analysts estimated a growth rate of -5.7% for the S&P 500, excluding the Magnificent 7. It came in at 0.3%, according to data from Ned Davis Research. 

Now for the second quarter, consensus calls for 1.1% growth rate for the same group. 

To be sure, none of this is to declare the death of the AI trade or tech bullishness. Those should continue without a hitch at least through another earnings season.

But especially as Fed rate cuts loom, my initial question stands: What happens if this rotation from the top really takes hold?

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

📉Big Tech tumbled by the most since 2022. The S&P 500’s longest winning streak since November came to a halt Thursday. The Mag 7 index saw its worst day in over a year, with traders ramping up bets for a rate cut in September. The S&P 500 shed 0.9% even as nearly 80% of its individual stocks climbed. (Bloomberg)

⚡️Tesla postponed its Robotaxi plans. Instead of August, the EV maker will debut the technology in October when it has more time to build additional prototypes. That announcement sent the stock down 8.4% on Thursday. (Yahoo Finance)

🏦 SF Fed President Mary Daly sees rate cuts ahead. She told reporters Thursday that easing could begin soon, though she did not specify whether that meant July, September or another month. “There is more information to gather,” she said. (WSJ)

Rapid-fire:

Last thing:

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