Simeon Hyman, Global Investment Strategist at ProShares Advisors, says strong earnings support U.S. markets, Fed independence remains intact, and small caps could benefit most from upcoming rate cuts.

New York

S&P 500 earnings have grown by 10% compared to the previous year, while Nasdaq 100 earnings have surged by 34%. This robust earnings performance is helping to sustain the strength of the U.S. market, even as European markets face challenges such as political uncertainty in France.

The discussion also highlights the importance of Federal Reserve independence and its influence on market dynamics. With potential for further rate cuts, small-cap stocks, particularly those focused on income, may benefit more than large caps due to their leverage and shorter maturities. Lower interest rates could also make equity income more attractive compared to traditional fixed income options.

Hyman: S&P 500 earnings are up 10% year over year

I think we've got to start with the futures. Are you surprised that the reaction isn't bigger in the futures market? No, because earnings are holding up. S&P 500 earnings are up 10 percent year over year and Nasdaq 100 earnings are up 34 percent year over year. And in this context of U.S. exceptionalism look at what's happening in France today. So you still have strength in the U.S. market that can be resilient in the face of some of these headwinds. By the way for people just joining the French prime minister called for a confidence vote coming up in September. That's weight on the broader European markets. The CAC is the biggest laggard. I want to go back to the U.S. that we're really focused on the U.S. today. What do you think this could potentially mean for the idea of Fed independence and American exceptionalism. As you just mentioned part of the American exceptionalism narrative is that we have an independent bank that makes decisions based on data and not necessarily on political motivation. I think the relative muted market reaction tells all of us that we're still in pretty good shape with respect to Fed independence. But look you have to be careful of what you wish for. Even just this little whisper of a little bit of deterioration of that is selling off the long end of the curve a little bit. You have to remember that the Fed only controls the short term lending rate. And if you lower that too much you get a steepener. It already happened the last round of cuts resulted in higher longer term interest rates. We were showing the kind of the spike in the two in the 10 year curve. As you mentioned the Fed has the biggest influence over the two year which actually moved down about seven eight basis points from the level we saw yesterday. I want to get to your word of the day. It's small caps. Your pick for us today is the I.T. W.O. ETF. It's the Russell 2000 high income ETF. So a small cap income focused ETF. Is this a pick based on the idea that we're going to continue to see rate cuts or at least pressure on the Fed to cut rates which would benefit cyclicals and small caps. This is two parts. So first there is room for the Fed to do two or three cuts and not really impact the long end of the curve because that's still consistent with even 3 percent inflation. And that will benefit small caps better than large because small caps are more leveraged and they have shorter maturity. So that's part of it. The other piece is now you're going to have lower rates on your money markets more challenges from in from income from interest rate and bonds. Better to get some equity income. And that's the story.

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