Wall Street Falls Amid Inflation Data and Semiconductor Decline

Wall Street fell on Friday, weighed down by semiconductor stocks and in-line inflation readings that did little to change expectations of a Federal Reserve interest rate cut in September. The S&P 500 declined, with UnitedHealth, J&J, and Eli Lilly in focus. Market participants remain cautious ahead of the Fed's decision, which could have a significant impact on the healthcare sector.

Wall Street fell on Friday, with semiconductor stocks and in-line inflation readings failing to alter expectations of a Federal Reserve interest rate cut in September. The S&P 500 declined, with UnitedHealth, Johnson & Johnson (J&J), and Eli Lilly in focus. Market participants remain cautious ahead of the Fed's decision, which could significantly impact the healthcare sector.

Morgan Stanley has revised its forecast, predicting two 0.25% cuts in 2025 to the Federal Funds Rate, with one cut expected in September and another in December [1]. This shift reflects a growing trend among global brokerages changing their forecasts due to Fed Chair Jerome Powell's recent remarks at the Jackson Hole Economic Symposium [1]. Powell's speech indicated a potential change in the Fed's approach, emphasizing risks to the labor market and downside risks to growth.

Powell's remarks triggered a wave of revised forecasts, with traders now expecting an 87.3% chance of a September cut of 0.25% [1]. This new policy path could set the stage for a rotation in leadership, potentially lifting previously lagging corners of the market, such as dividend-paying stocks, small caps, and healthcare.

The healthcare sector could be one of the biggest beneficiaries of a rate cut. The Health Care Select Sector SPDR (NYSEARCA: XLV), which tracks large healthcare companies like Johnson & Johnson, Eli Lilly, and UnitedHealth, has lagged behind the S&P 500 and leading growth sectors in the higher-rate regime. A shift to a lower-rate environment could spark renewed interest from income-oriented investors seeking stable, dividend-paying sectors [2].

Small caps, which have been one of the biggest victims of the higher-rate regime, may also see a rebound. The iShares Russell 2000 ETF (NYSEARCA: IWM), which tracks small-cap U.S. stocks, has returned just 7.29% over the past three years. However, the tide may be turning, with IWM up more than 15.5% over the past quarter, signaling renewed investor appetite for small-cap exposure [2].

Market participants remain cautious ahead of the Fed's decision, which could have significant implications for the healthcare sector. UnitedHealth, J&J, and Eli Lilly were in focus on Friday, with investors closely watching the Fed's next move. If the Fed does cut rates, these companies could see a boost, potentially driving a rotation in leadership and lifting previously lagging sectors.

References:
[1] https://www.thestreet.com/fed/morgan-stanley-makes-major-change-to-fed-interest-rate-cut-forecast
[2] https://www.nasdaq.com/articles/top-5-etfs-and-stocks-watch-fed-eyes-rate-cuts