As we were heading into the July 11th inflation report, we talked about the huge divergence in the performance of a handful of tech giants and "the rest" of the stock market. The divergence was at historic extremes.
And we looked at this chart (now updated) …
Let's step through it again.
As you can see, when the Fed signaled the end of the tightening cycle, we had broad based strength in stocks.
That correlation broke down when Nvidia reported earnings last May. After twelve months of explosive growth, Jensen Huang said Nvidia was poised for the "next wave of growth."
We can deduce from the chart above that concerns emerged about the viability of an easing cycle, given the growth tidal wave of the technology revolution. Cash rich tech stocks that don't have to worry about borrowing rates go up. Almost everything else goes down.
But, good news: The inflation data continued to decelerate. And then we got the negative monthly inflation print on July 11th (the first monthly price decline since May of 2020). And that was the catalyst for this divergence to close.
And it has, aggressively.
And we get the Fed's favored inflation data point on Friday, which should continue to support the rate cut picture, which will continue to provide fuel for the broadening of the stock market performance.