Good morning! The Dow rallied 0.7% on Monday while Nvidia tumbled another 5% to pull the company further away from its briefly-held title as the world’s most valuable company.

Today, we’re unpacking the stock market’s shifting focus away from interest rates.

After that, we’re getting into how stablecoins could fix the US debt crisis.

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Growth over interest rates

Stocks have been climbing all year, but the reasons for the rally are starting to shift. 

At the start of 2024, markets had priced in as many as seven interest rate cuts from the Federal Reserve. That’s since pared to fewer than two on account of soft economic data and sticky inflation. 

Now, with the second half of the year about to kick off, investors have turned their focus from rates and inflation to growth.

A few points explain this: 

• A narrow handful of stocks have fueled the stock rally

• Small-cap stocks have under-performed 

• Most stocks are seeing valuations fall more than earnings are rising 

In a Monday note, Bank of America researchers pointed to the divergence in the relative performance of the Nasdaq 100 versus the Russell 2000 and the 10-year yield as evidence of this shift.

When growth is strong, the small-cap index tends to trade “very closely” with rates, according to data from the firm.

But the correlation has weakened over recent months, suggesting investors are indeed fixated on growth concerns.

“Perhaps the reason some folks might say the market is shifting from a focus on rates to growth is because the market and many peers seem to be coming around to our view that inflation is in a better place,” said Jeff Krumpelman, chief investment strategist at Mariner.

“Now they need to monitor whether or not the solid economic and earnings growth we have seen can continue to be sustained.”

It’s worth noting that this change doesn’t necessarily foreshadow bad news for stocks. 

Even an extremely concentrated rally, historically, does not mean weak returns ahead are a given.

The average equal-weighted index return six months after narrow breadth readings is 5%, according to Morgan Stanley. 

In any case, as the focus on growth comes to shape the market narrative, the fact of a Fed rate cut will matter less than the motivation for a cut as far as investors are concerned. 

Mike Reynolds, VP of investment strategy at Glenmede, pointed out that adjusting policy in the event of a soft landing yields a different market reaction than the same adjustment made in the face of a recession. 

“The details of why they cut matters,” Reynolds told me. “If they’re cutting because there’s economic trouble, you could see a pullback. But if they cut rates because inflation is cooling as they want, that’s going to be favorable for stocks.”

What is your S&P 500 forecast for the end of the year? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

📉Tech stocks are taking a breather. Nvidia, Microsoft, and other tech names tumbled Monday, supporting some analysts’ view that the market at large is due for a pullback. If the temporary weakness in tech persists, the thinking goes, that could spread to other sectors. (Bloomberg)

💰️Nvidia CEO Jensen Huang is on a selling spree. While the chip-maker’s stock has enjoyed a meteoric rally this year, SEC filings show he sold 720,000 shares from June 13 to June 21, for a total of $94.6 million. Huang sold more stock in that stretch than he did in all of 2023. (Barron’s)

🚀Fundstrat is as bullish as ever. The firm’s founder Tom Lee said the S&P 500 could trade 175% higher from current levels to hit 15,000 by 2030. He’s watching two primary themes for the next several years: a generational wealth transfer and global labor shortage. (Business Insider)

Rapid-fire:

• Nvidia has lost $500 billion in market value since its brief stint as the world’s most valuable company a week ago (FT)

• ICE, the parent of the New York Stock Exchange, aims to become a clearinghouse for US Treasuries (Business Wire)

• Alnylam Pharmaceuticals’ stock soared 35% after positive results in a trial for a heart drug (WSJ)

• Bernstein analysts say crypto could mark the new “Trump trade” (Bloomberg)

• Chipotle is set for a 50-to-1 stock split on June 26 (Barron’s)

Interview:

I sat down with investor Anthony Pompliano to discuss how stablecoins could help fix the US debt crisis.

Last thing:

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