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Inside Markets — Broadening Out

Broadening Out

January 21, 2025

The fundamental drivers of the risk-on rally have been lower bond yields and a strong start to CQ4 earnings season. Ten-year yields fell ~13 bps last week to close the week at 4.60% amid a dovish CPI print. Hawkish rate assumptions unwound as that level falls comfortably below prior resistance at 4.71%. Combining the dovish CPI print with the December Jobs Report gives you a Goldilocks macro backdrop that should support continued earnings growth. Large cap banks kicked off Q4 earnings season with solid revenue performance, while credit metrics remained healthy. In addition, results from TSM helped reestablish a bullish AI semiconductor narrative, while solid Q4 results from Richemont hinted at an eventual recovery in European domestic demand.

The RTY and SPX triggered bullish momentum divergence signals last Monday, while the same reversal indicators weren’t present in the NDX. On Tuesday, we suggested the RTY had greater upside than the SPX because it was more deeply oversold, not because there were indications of an enduring cyclical rotation. We expect more near-term upside in the RTY, but don’t expect a broad cyclical rotation at the expense of mega-cap Tech – at least not yet – given that cross market indicators (copper/gold futures ratio) and internal indicators (RTY/NDX ratio) remain at subdued levels.

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