Macro Overview
U.S. equities surged on Thursday, with the S&P 500 climbing to a new record high as investors grew more optimistic about a potential Federal Reserve interest rate cut. The positive sentiment was fueled by softer-than-expected private payrolls data, suggesting a cooling labor market that could give the Fed room to ease policy. The benchmark S&P 500 (IVV) gained 0.82% on the day. The risk-on appetite was evident in the outperformance of cyclical sectors, with Consumer Discretionary (XLY) adding 1.83%. However, the optimism did not extend to all asset classes, as the high-beta cryptocurrency space saw a sharp downturn, with Ethereum (ETHA) falling -4.64%.
U.S. Size & Style
Gains were seen across the U.S. equity landscape, with a notable rotation into smaller-capitalization stocks. Small-cap value (IJS) was the day’s top-performing major style category, rising 1.72%, while small-cap blend (IJR) gained 1.50%. This rally in smaller, more economically sensitive companies contrasted with the relative underperformance of defensive strategies, such as minimum volatility (USMV), which rose a mere 0.16%. Despite the strong daily performance, recent sentiment has been more cautious, with U.S. Small Cap Blend ETFs (e.g., IJR) experiencing net outflows of $338 million over the past week.
U.S. Sectors & Industries
Cyclical sectors led the market higher, reflecting investors’ increasing comfort with economic risk ahead of key data. The Consumer Discretionary sector (XLY) was the standout performer, gaining 1.83%, driven by a powerful 3.16% surge in the Homebuilders industry (XHB) on hopes of lower borrowing costs. In contrast, defensive sectors lagged significantly, with Utilities (XLU) falling -0.12% and Consumer Staples (XLP) managing only a 0.06% gain. Investor sentiment appears to be warming to financials, as the sector (XLF) attracted the most significant inflows over the past week, pulling in over $1.05 billion.
Global Thematic
Thematic ETFs saw significant divergence based on their underlying drivers. Strategies tied to the U.S. housing market and consumer spending, such as Homebuilders (XHB, +3.16%) and Online Retail (ONLN, +1.98%), were among the day’s best performers. Conversely, themes exposed to digital assets faced heavy selling pressure. Crypto Miners (WGMI) was the worst-performing thematic ETF, plummeting -4.98%, followed by other blockchain-related funds (BLOK, -1.37%). In a potential sign of hedging, investors poured $302 million into Gold Miners ETFs (GDX) over the past week.
Developed Markets ex-U.S.
International developed markets participated in the global equity rally, with the broad MSCI EAFE Index (EFA) climbing 0.73%. European equities showed particular strength, with ETFs tracking the Netherlands (EWN) and Switzerland (EWL) gaining 1.24% and 1.14%, respectively. Hong Kong (EWH) was a notable outlier, falling -0.66% on the day. Despite recent pullbacks, German equities (EWG) have been a standout performer year-to-date, posting a gain of 32.06%.
Emerging Markets
Emerging market equities failed to keep pace with their developed market counterparts, weighed down by weakness in key regions. The broad MSCI Emerging Markets Index (EEM) dipped -0.32% for the session. The decline was primarily driven by significant losses in China (MCHI), which fell -1.68%, and South Africa (EZA), which dropped -1.96%. Latin America was a pocket of relative strength, with Mexico (EWW) adding 0.43%, continuing its impressive year-to-date run of over 37%.
Fixed Income
Fixed income assets posted broad gains as Treasury yields fell on the back of the weak labor market data, bolstering expectations for a Fed rate cut. The core U.S. aggregate bond market (AGG) rose 0.40%. Longer-duration bonds were the day’s biggest winners, with the Vanguard Long-Term Bond ETF (BLV) gaining 0.86%. Investors have been actively increasing their fixed income exposure, with Taxable Core bond funds seeing more than $1 billion in net inflows over the past week.
Commodities
It was a broadly negative session for the commodity complex. Energy products declined, with the Invesco DB Energy Fund (DBE) losing -1.00%. Precious metals, which typically act as a safe haven, also sold off amid the equity market euphoria. Platinum (PPLT) was the hardest-hit, falling -3.32%, while Silver (SLV) declined by -1.10%. The daily price action stood in sharp contrast to recent investor flows, which saw an enormous $4.58 billion pour into Precious Metals ETFs over the last trading week.
Cryptocurrency
Digital assets experienced a sharp sell-off, decoupling from the risk-on sentiment seen in traditional equity markets. The decline was led by the second-largest cryptocurrency, with the iShares Ethereum Trust (ETHA) falling -4.64%. The leading digital asset also faced pressure, as the iShares Bitcoin Trust (IBIT) dropped -2.23%. While a sharp pullback, it comes after a period of exceptional long-term performance, with ETHA still up over 62% over the past three months.
What to Watch Today
The main event for global markets today is the release of the U.S. August Employment Report at 8:30 AM ET. This report, which includes Non-Farm Payrolls, the unemployment rate, and average hourly earnings, is one of the most critical data points for the Federal Reserve. Investors will be scrutinizing the figures for signs of further labor market weakness, which would solidify the case for an interest rate cut at the Fed’s next meeting. A weaker-than-expected number could fuel further gains in equities and bonds, while a surprisingly strong report could quickly reverse Thursday’s rally by dampening rate-cut hopes.
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Disclosures
This material is for informational purposes only and should not be considered investment advice. All investments, including ETFs, involve risk, including the possible loss of principal. Investors should consider their investment objectives, risks, charges, and expenses carefully before investing.
This analysis was developed by the team at ETF Action. We leverage advanced AI tools to assist in the drafting and refinement of our content, based on our expert prompts, direction, and final review.
