As the country spent the weekend celebrating 250 years of independence, the market spent it broadening out. Last week handed us softer jobs, cheaper oil, and a rally spreading beyond the biggest names, pointing investors back to the question of how much should really be riding on US large caps.

Cooler Jobs, Cheaper Oil

June payrolls came in at 57,000 jobs, well short of the 114,000 expected and below the 155,000 monthly average the economy ran from March through May. Unemployment ticked up to 4.2% while crude oil fell below $70 a barrel, close to where it traded before the conflict, and a full 40% below March highs. Softer labor and cheaper energy pulled inflation in the same direction and the market took note. Treasury yields moved lower and the odds of a September rate hike fell to around 46% from roughly 65% ahead of the report. If cooling jobs and falling oil mean inflation expectations have been sitting too high, the move down in yields seems like the logical response.

The Field Widens

As rate-hike expectations eased, money rotated into the sectors that tend to hold up when rates fall, most of them in defensive corners of the market. One-month returns through July 2 show Healthcare as the leading sector up 12%. Those gains were followed by Financials +8%, Industrials +5%, Utilities +4%, and both Consumer Staples and Real Estate up ~3%. The lagging groups tell another part of the story with Technology down 8% and Communication Services down 3.5%. Several of the largest AI-linked names sit within these trailing groups. Investors look to be widening the field, with capital flowing toward rate-sensitive and defensive areas, and away from the most crowded growth trades.

Study Abroad

US large cap has led for years and still anchors most portfolios. Adding up the risk and factor exposure of every name in its universe, Pave’s optimization engine scored the US above every other country on both volatility and oil sensitivity last week, highlighting how much of the total risk sits in a single market. On return scoring, the US landed in the middle of the pack, with markets like the UK, Switzerland, Japan, and Canada grading higher. The combination of the most concentrated risk paired with a middle-of-the-pack return score is a strong case for spreading out. As the market broadens across sectors in the States, the same broadening is worth applying overseas. After a long run of US large-cap leadership, letting the rest of the world back into the conversation looks reasonable.

By Stephen Evans, CFA

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