After four years, the Fed finally cut rates last week. Here’s how the market performed.
While the Dow Jones Industrial Average and S&P 500 touched all-time highs last week during the rate cut rally, the best performers were small cap stocks and mid cap stocks.
The small cap Russell 2000 gained 2.1% last week to 2,228, while the leading mid cap index, the S&P 400, climbed 2.3% to 3,103.
The Dow Jones Industrial Average closed the week at an all-time high of 42,063, up 1.6% for the week, while the S&P 500 closed the week at 5,702, up 1.4% for the week. The S&P 500 was just off the 5,713 all-time closing high it set last Thursday.
The Nasdaq Composite also had a solid week, gaining 1.5% to end Friday at 17,948.
Smaller caps lead the way
While it is only a one-week snapshot, the market’s reaction to the long-awaited rate cuts last week may provide some insight into where things are headed.
Many market watchers have predicted that small cap stocks will emerge the big winners from a decline in interest rates for a couple of reasons.
One, large caps have been so dominant in recent years that they have become overvalued, which has created a fair bit of volatility in recent months. It has led investors to seek out better deals elsewhere, particularly small caps, as they have been beaten down during this period of high interest rates and are cheaply valued.
Also, smaller companies stand to benefit from falling interest rates because it will make it cheaper for them to borrow and invest in their future growth. Many smaller companies had curtailed or put off major investments during this period of high interest rates, but now as rates steadily come down, you’ll see more small cap investment and growth.
Last week, investors sought opportunities in small caps and mid caps, largely for these reasons. That trend should continue as rates are expected to continue to steadily fall this year, throughout 2025, and into 2026 — perhaps even beyond.
However, investors should make sure they do their research, as many small caps don’t get the coverage that large caps do, and many, roughly one-quarter, are not profitable. Picking small caps is not easy, but fortunately, there are many great small cap ETFs that can tap into the best small caps in a diversified manner.
Micron earnings, PCE inflation, and Powell
Earnings season has slowed to a crawl as we head into the final week of the third quarter. However, there are still a couple big names to report earnings this week, including semiconductor stock Micron Technology (NASDAQ:MU) and big box retailer Costco (NASDAQ:COST).
Analysts expect Micron to post earnings of $1.13 per share, up from a $1.07 per share loss in the same quarter a year ago. Revenue is projected to climb 90% year-over-year to $7.6 billion. Look for Micron’s earnings Wednesday after the market closes.
Costco reports earnings Thursday after the market closes, and analysts are anticipating earnings to grow 4.5% year over year to $5.08, and revenue to increase 1.3% to $79.9 billion. Costco stock is up 39% YTD.
Also, there are some key economic reports coming out this week, starting with consumer confidence on Tuesday, new homes sales on Wednesday, jobless claims on Thursday, and the Personal Consumption Expenditures (PCE) inflation report on Friday.
Finally, Federal Reserve Board members are out in force this week, likely discussing last week’s rate cuts and the road ahead. Most notably, Michelle Bowman, the lone vote against the 50-basis point reduction, speaks on Tuesday and Thursday at different events, and Fed Chair Jerome Powell speaks Thursday morning at the 2024 U.S. Treasury Market Conference in New York City.
