June wholesale prices rose despite deflation in energy, food and in the transportation and warehousing category. The Producer Price Index (PPI) rose 0.2% month over month (m\/m) and 2.6% year over year (y\/y), stronger than the 0.1% and 2.3% projected as well as the -0.2% and 2.2% in May. Similarly, core figures, which exclude food and energy, posted upside beats of 0.4% m\/m and 3% y\/y, loftier than the median estimates of 0.2% and 2.5% and the previous month\u2019s 0.3% and 2.3%. While energy, the transportation and warehousing component and food saw charges drop 2.6%, 0.4% and 0.3%, trade services and other services experienced cost increases of 1.9% and 0.1%.<\/p>\n\n\n\n Past performance is not indicative of future results<\/p>\n\n\n\n Folks are currently feeling the lousiest they have this year regarding the economy and their finances, with the University of Michigan\u2019s (UMich) Consumer Sentiment Index declining for the fourth consecutive month. Sentiment dropped to 66, beneath projections of 68.8 and June\u2019s 68.2. Both sub-indices for current conditions and future expectations sunk to 64.1 and 67.2 from 65.9 and 69.6 during the period. Meanwhile, inflation expectations for one- and five-year periods both dropped from 3% to 2.9%. Still, consumers blamed elevated prices for their sour moods, while uncertainty concerning November\u2019s presidential election also weighed upon sentiment. <\/p>\n\n\n\n Past performance is not indicative of future results<\/p>\n\n\n\n Corporate CFOs continue to emerge from their capital raising hibernation, helping JPMorgan Chase, Citigroup and Wells Fargo beat analyst consensus expectations for second-quarter earnings and revenue. The increased capital raising activity follows a pickup in investment banking earlier this year that helped Morgan Stanley and Goldman Sachs post strong first-quarter results. Today\u2019s better-than-anticipated earnings releases, however, featured commentary regarding potentially persistent inflation and high interest rates. Credit losses also emerged. Consider the following earnings highlights:<\/p>\n\n\n\n Asset prices are rewarding market bulls with stocks and bonds levitating alongside some of the cyclical commodities. All major US equity indices are gaining, with the Russell 2000, Nasdaq Composite, S&P 500 and Dow Jones Industrial benchmarks higher by 1.5%, 1.1%, 0.9% and 0.8%. Sectoral participation is terrific\u2014every segment is higher. Piloting the bulls are consumer discretionary, technology and industrials, which are flying north by 1.6%, 1.4% and 1%. Treasurys are catching bids as well with the 2- and 10-year maturities changing hands at 4.48% and 4.20%, 4 and 2 basis points (bps) lighter on the session. Softer borrowing costs, heightening Fed easing wagers and decelerating economic prospects are weighing on the dollar, with its index down 39 bps. The greenback is losing ground relative to each of its major counterparts minus the yuan. It\u2019s down versus the euro, pound sterling, franc, yen and Aussie and Canadian dollars. Commodities are mixed with copper and crude oil higher by 1.3% and 0.4% but lumber, silver and gold lower by 2.4%, 1.8% and 0.2%. WTI crude is trading at $83.28 per barrel on a lighter supply outlook amidst stable demand prospects.<\/p>\n\n\n\n While yesterday\u2019s market trading demonstrated enthusiasm for small caps and value, the economy has created an increasingly narrow path for those categories to outperform, a development that is likely to put even more significance on the ability of the Magnificent Seven to power market gains. I see two possible scenarios going forward. One scenario is the much hoped for soft landing, which is likely to feature elevated interest rates and investors requiring a significant risk premium as a result. These factors would create a strong headwind for rate-sensitive small-cap companies and value-tilted sectors that lack exciting narratives to drive multiple expansion. The second possible scenario\u2014recession\u2014would create revenue challenges for all corporates, but it would be particularly painful for small-cap firms which carry slim margins in aggregate. In this environment, value names are also likely to struggle because, their only answer to revenue pressures would be to reduce expenses, generally speaking. In either scenario, it will be essential for the Magnificent Seven to continue to generate revenue and earnings growth by disrupting existing industries with new products, such as artificial intelligence, robotaxis’, automation and ledgers associated with blockchain technology. But given the recent runup amidst eye-watering valuations and an equity risk premium that is negative when compared to short-term yields and in the basement relative to the long-end, the risk of a significant drawdown in the 20% range could be in the cards.<\/p>\n\n\n\n![\"Producer](\"https:\/\/ibkrcampusdev.wpengine.com\/wp-content\/uploads\/sites\/3\/2024\/07\/PPI-7-12-24.png\")
<\/figure>\n\n\n\nConsumers Express Worst Sentiment of the Year<\/strong><\/h2>\n\n\n\n
![\"Sentiment\"](\"https:\/\/ibkrcampusdev.wpengine.com\/wp-content\/uploads\/sites\/3\/2024\/07\/Consumer-Sentiment-7-12-24.png\")
<\/figure>\n\n\n\nInvestment Banking Powers Earnings Beats<\/strong><\/h2>\n\n\n\n
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Small Caps Lead Today\u2019s Rally<\/strong><\/h2>\n\n\n\n
Small Caps and Value Face Narrow Path<\/strong><\/h2>\n\n\n\n