Did you know that the global economy's reliance on the U.S. dollar dates back to the Bretton Woods Agreement of 1944, which established the dollar as the world's reserve currency?

This historical fact highlights the long-lasting importance of the dollar in international trade and finance, and the potential impacts of any shifts in its status.

In today’s issue, you'll find:

• AI Doubts Are Growing – Investors Could Be Making A Mistake: First, we’ll explore the recent shifts in investor sentiment from mega cap tech stocks to small-caps 💻

• What Comes Next After The Stock Market’s Rotation? The ‘Exhaustion’ Factor: Next, we’ll look at the factors behind the recent rotation from tech to small caps and value stocks 📊

• The Dollar Rally May Be Over, But Don’t Mistake That To Mean That The Dollar’s Dominance Has Ended: Finally, we’ll learn why the dollar's recent weakening doesn't signal the end of its dominance as the world's reserve currency 💵

We hope you find these articles insightful and valuable as you make your way through the stock market and the global economy. Let’s get it!

AI Doubts Are Growing – Investors Could Be Making A Mistake 💻

The mega cap tech stocks that have driven the market all year are officially sputtering.

One explanation for the downturn has been an investor rotation from Big Tech to small-caps.

The tech-led Nasdaq Composite began sinking in relation to the Russell 2000 index around July 10.

Analysts across Wall Street seized on the Russell’s breakout to dust off neglected small-cap names.

But no single factor explains market trends, and those little Russell stocks can’t absorb all the mega cap money 🤷

The diverging fortunes of the two indexes only retraces a few months of the Nasdaq’s outperformance of the Russell and the S&P 500 this year.

Another explanation for the sentiment shift is that investors now fear spending on artificial intelligence is about to slow.

If anyone sold stocks in the belief that AI investment will slow, they haven’t been listening to the people doing the spending.

Big Tech companies will continue to buy AI hardware from Nvidia and the other vendors.

No one can predict the winners of the AI sweepstakes in the long run, but in the near term, you had better believe the money will keep flowing 💰

What Comes Next After The Stock Market’s Rotation? The ‘Exhaustion’ Factor 📊

What’s been driving the rotation away from tech and into small caps and value stocks?

The hope is that the Fed will cut interest rates, the economy will stay strong, and earnings growth in the sectors that have underperformed tech will accelerate.

Rate cuts, in particular, are most helpful for companies that are economically sensitive, have a lot of debt, or are just plain small 🏪

That’s reflected in the performance of small- versus large-caps, with the Russell 2000 outperforming the S&P 500 by 12.7 percentage points over the 12 days ended July 24, the largest gap for that period on record.

The rally has been so intense, and the drop in the S&P 500 large enough, that the Russell, which started July up 1% for the year, is now up 11%—just three percentage points behind the large-cap index’s 14% rise.

Sustaining the rotation won’t be easy 😧

Much of the tailwind from rate cuts is already priced in.

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The Dollar Rally May Be Over, But Don’t Mistake That To Mean That The Dollar’s Dominance Has Ended 💵

Whenever the Fed begins a rate cutting cycle, the dollar tends to weaken against other currencies, because currency and bond investors tend to seek returns in currencies with higher yields.

But that is just a cyclical fluctuation in the dollar.

The dollar will retain its status as the reserve currency in the world even as it weakens somewhat.

In fact, a somewhat weaker dollar will boost the US economy by making our exports more affordable for other countries to buy 🤑

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