According to Bloomberg, a weeklong decline in almost every major group has led to speculation that the central bank may ease its efforts to control inflation. This has prompted a shift in investor focus. While data suggesting the Federal Reserve is close to cutting rates would typically support this trend, Thursday's market surge did not fully align with that expectation.Investors have moved away from 'over-crowded' megacap leaders and are now exploring 'down-cap' opportunities. In late trading hours, Treasury yields also experienced significant changes. Analysts caution that while there is enthusiasm about the broadening of US equity markets, there is also a risk of potential bull traps. The rotation into smaller-cap stocks is still in its early stages and cannot yet be confirmed as a long-term investment trend.Some digestion of this rotation is necessary after the significant market movements of the past week. Although the rotation could persist for weeks, driven by favorable economic data and an over-owned tech sector, some experts advise against aggressive allocations to cyclicals for anything other than tactical capital. Concerns about economic growth remain, with corporate earnings and Federal Reserve commentary suggesting that investors may be too complacent about slowdown risks.As the Federal Reserve begins a rate-cutting cycle, markets often react positively initially and for a short period afterward. However, the Fed typically cuts rates late in the economic cycle, not early when small-cap stocks usually gain attention. In the near term, the rotation into smaller stocks may continue as markets anticipate easier monetary conditions this fall. The key question is whether this will lead to a gradual cooling of inflation and job markets or a more abrupt and painful adjustment.
