The MEM Edge

Focused Market Leadership Ahead Of Core Inflation Data - Here's What Investors Need To Look Out For

Mary Ellen McGonagle

Mary Ellen McGonagle

President, MEM Investment Research

On Friday, the Nasdaq Composite posted its best day in more than five months, with a 2% rally that pushed this Index further into an uptrend. The S&P 500 had a good day as well, with all eleven sectors advancing higher. The sharp gain in the Nasdaq was led by a pronounced move into Growth stocks led by the Magnificent Seven, with each of these names outperforming the broader markets. The growth-heavy Technology sector was the top-performing, followed by Communication Services and Consumer Discretionary.

As you may know, growth stocks are highly sensitive to interest rates, as they fare poorly in a rising rate environment due to the value of their future earnings being reduced. Last week, we saw interest rates pull back early on and remain steady. This steadiness in rates was despite hawkish comments from Fed Chair Powell on Thursday which followed similar remarks from several Fed Governors earlier in the week. Below is a chart of the S&P 500 Index, with the yield on the 10-year Treasury bond overlaid on top.

Daily Chart of S&P 500 with 10-Year Treasury Yield

Of note on the chart above is that the market's May-into-late-July rally took place when the yield on the 10-year Treasury was in the 3.9%-4.2% range. We're not quite in that sweet spot range at this time, but last week's stabilization of rates, despite Fed comments that point to the possibility of a higher-for-longer rate policy, was constructive. You'll want to keep a close eye on yields before jumping totally into these markets.

In addition to lower interest rates, another key to a prolonged uptrend in the markets will be broader participation beyond the Magnificent Seven and other growth stocks. Below is a chart of the equal-weighted S&P 500 Index, with the Vanguard Growth ETF (VUG) overlaid on top. The top holdings in this ETF are the mega cap FAANMG stocks as well as Nvidia (NVDA).

Equal-Weighted S&P 500 Index with Vanguard Growth ETF

As you can see, the May-into-late-July rally this year was given a considerable boost by a broadening out into other areas, as shown by the uptrend in the equal-weighted S&P 500. Gains in Industrials (XLI), Basic Materials (XLB), and Energy (XLE) sectors -- to name just three areas -- created a firmer footing beyond just Growth stocks. Last week, the equal-weight S&P 500 fell 0.6% while the broader S&P 500 with heavily weighted FAANMG names, gained 1.3%.

While last week's rally in the markets keeps the near-term uptrend in place, I'm on the lookout for further confirmation that this uptrend has a firm base from which to spring higher. Next week, key inflation data will be released, with core CPI and PPI reports due. Any hints of an increase in consumer or producer prices will not be good for the markets. That said, there are clear-cut, long-term winners that have revealed themselves over the past 3 weeks, and venturing into them at current levels makes sense. If you'd like to have immediate access to these stocks, as well as to any sentiment shift on the markets, use this link here to take a trial of my twice-weekly MEM Edge Report.


Mary Ellen McGonagle

MEM Investment Research

Mary Ellen McGonagle
About the author: is a professional investing consultant and the president of MEM Investment Research. After eight years of working on Wall Street, Ms. McGonagle left to become a skilled stock analyst, working with William O’Neill in identifying healthy stocks with potential to take off. She has worked with clients that span the globe, including big names like Fidelity Asset Management, Morgan Stanley, Merrill Lynch and Oppenheimer. Learn More