As we've discussed over the past week, tailwinds are building for stocks just as we’ve made new record highs in the major indices.
We now have the budget bill passed, and it will have an immediate incremental growth impact on the economy. The full expensing provision (retroactive to the start of the year) will incentivize companies to research, develop and build now.
So, we're getting fiscal fuel, and we should be getting close to a resumption of the interest rate easing cycle (monetary fuel).
That said, it may come with or without Jerome Powell. Last week Trump explicitly called for Powell to resign. Today, Kevin Warsh, on Trump's short list of candidates to replace Powell, was on TV calling for regime change at the Fed.
Add to this, as we discussed last week, the risk of dysfunction in the Treasury market has been materially lowered now that the Fed has signaled that it will relax bank regulatory constraints.
So, the stars are aligning for a risk-on market environment, except for the overhang of the July 9th (self-imposed) tariff deadline. But that self-imposed deadline has now been extended to August 1.
With all of this, let's revisit this small cap vs. big tech chart we observed back in my June 23rd note (here).
Remember, when Jerome Powell signaled the end of the tightening cycle in October of 2023 (a dovish pivot), both the Russell (small caps) and the Nasdaq (led by big tech) rose nearly 50% over the next 13 months.
Then the Russell topped first, in late November last year, on the "reflation" fears of Trump policies, and the potential for a shallow easing cycle.
We've since had the Fed pause.
We've had the tariff-fear induced broad sell-off across stocks.
And now we've had a full V-shaped recovery for the Nasdaq and the S&P 500 (back to new record highs).
But the Russell is still well below its record highs — it has dramatically underperformed since the Fed started signaling a pause of the easing cycle.
That said, if you believe the Fed and Jerome Powell are feeling the heat, and the resumption of the easing cycle is coming, then the performance gap in the chart above should start closing aggressively.
I'll be away the remainder of the week, so you will not receive a Pro Perspectives note from me.
In the meantime, if you’re not already with us, I invite you to join my premium services: The Billionaire’s Portfolio and the AI-Innovation Portfolio. Both are performing well, and both are positioned to capitalize on the pro-growth shift and the next wave of the technology revolution.
You can find more information here and here.