Most Gulf markets continue to rally on prospects of a US Federal Reserve rate cut

Most Gulf markets ended higher on Sunday, extending gains from the previous session after data confirmed the likelihood of interest rate cuts by the U.S. Federal Reserve. The U.S. Consumer Price Index (PCE) — the Federal Reserve’s preferred measure of inflation — rose 0.2% in July, according to Commerce Department data released Friday. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month, the report showed.

The data sets the stage for the Fed to begin easing monetary policy this month. Money markets are pricing in the Fed’s first 25 basis point (bp) cut this cycle at its September meeting, with a 33% chance of a 50 bp cut. Monetary policy in the six-member Gulf Cooperation Council (GCC), including Saudi Arabia, is typically driven by the Fed because most regional currencies are pegged to the U.S. dollar. Saudi Arabia’s benchmark index rose 0.4%, with aluminum maker Al Taiseer Group up 3.1% and Al Rajhi Bank closing the day higher by 0.8%. In Qatar, the index rose 0.3% and Islamic lender Masraf Al Rayan rose 1.5%. Outside the Gulf, Egypt’s blue-chip index rose 0.4%, led by a 1.7% gain by Talaat Mostafa Group. Egypt’s net foreign assets (NFA) rose by $220 million in July, remaining positive for a third straight month after being deeply negative for more than two years, central bank data showed. SAUDI ARABIA rose 0.4% to 12,189 QATAR rose 0.3% to 10,230 EGYPT rose 0.4% to 30,903 BAHRAIN fell 0.1% to 1,956 OMAN rose 0.3% to 4,760 KUWAIT fell 0.2% to 7,806

Broader gains in U.S. stocks are providing an encouraging sign to investors who are wary of a concentration of technology stocks as markets await key jobs data and an expected Federal Reserve rate cut in September.

While the market’s fortunes rise and fall with big tech stocks like Nvidia and Apple, investors are also piling into lesser-loved value stocks and small-caps that are likely to benefit from lower interest rates. The Fed is expected to begin a rate-cutting cycle at its monetary policy meeting on Sept. 17-18. Many investors see this broadening trend, which gained momentum last month before fading during a sell-off in early August, as a healthy development in a market led by a group of giant tech names.

Chipmaker Nvidia, which has benefited from bets on artificial intelligence, alone accounted for about a quarter of the S&P 500’s 18.4% year-to-date gain. “No matter how you look at it, there’s a pretty significant broadening, and I think it has its chance,” said Liz Ann Sonders, chief investment officer at Charles Schwab.

Value stocks are stocks of companies that trade at a discount to metrics such as book value or price-to-earnings, and include sectors such as financials and industrials. Some investors believe the rally in these sectors and small caps could continue if the Fed lowers borrowing costs while the economy remains healthy. Market rotation has accelerated recently, with 61% of stocks in the S&P 500 outperforming the index over the past month, compared with 14% over the past year, data from Charles Schwab showed. Meanwhile, the so-called Magnificent Seven group of tech giants — which includes Nvidia, Tesla and Microsoft — have underperformed the other 493 stocks in the S&P 500 by 14 percentage points since a weaker-than-expected U.S. inflation report was released on July 11, according to an analysis by BofA Global Research. Shares also held steady despite Nvidia’s guidance earlier in the week falling short of investor expectations, another sign that investors may be looking beyond technology.

The S&P 500 Index, a weighted average gauge of stocks, hit a new record this week and is up about 10.5% year-over-year, narrowing the performance gap with the S&P 500.

“As market breadth improves, the message is that more stocks are rising on expectations that economic conditions will support earnings growth and profitability,” analysts at Ned David Research wrote. Value stocks that have done well this year include General Electric and midstream energy company Targa Resources, which are up 70% and 68%, respectively. Meanwhile, the small-cap Russell 2000 index is up 8.5% from its lows this month, although it has not broken through its July peak.

The employment report “is typically one of the most exciting news stories on the market, and now it will attract even more attention than usual.”

Jason Alonzo, a portfolio manager at Harbor Capital, said investors are unlikely to turn away from technology stocks, especially if volatility allows them to buy at a low price.

Technology stocks are expected to post above-market earnings growth in every quarter through 2025, with third-quarter earnings rising 15.3% compared with a 7.5% gain for the S&P 500 as a whole, according to LSEG data.

“People sometimes take a deep breath after a good period and look at other opportunities, but technology is still the clearest driver of growth, especially artificial intelligence, which is innocent until proven guilty,” Alonzo said.

Reuters Agency