😍 Investors flocked to a new favorite

What’s going on here?

US inflation was slightly cooler than expected in December, giving consumers – and investors – some relief.

What does this mean?

Earlier this month, a blockbuster jobs report had everyone worried. America’s labor market seemed almost too strong – and likely to keep the heat on the economy’s stubborn inflation. That raised concerns that the Federal Reserve (Fed) might need to hold off even longer on cutting interest rates. And the uncertainty of all that was rattling markets, with both stocks and bonds taking a hit. Fortunately, investors got a sliver of good news on Wednesday: data showed that US consumer prices increased by 2.9% in December from a year ago. That marked the third straight month of rising inflation, sure, but it matched economist’s forecasts. And the core inflation measure – which strips out volatile food and energy items to give a better idea of price pressures – unexpectedly fell, landing at 3.2%.

Why should I care?

For markets: Lightning-fast reactions.

US stocks jumped immediately after the report, while Treasury yields and the greenback slumped. Traders quickly changed up their bets, wagering that the Fed will next cut rates by July, instead of September. But all that tells you is just how jittery the market is lately – and that folks were clearly bracing for worse.

The bigger picture: Elephant in the room.

The core inflation slowdown is a win for households and the Fed. But for investors, there’s still a big wildcard in play: US tariff plans. The president-elect has vowed to slap a minimum 10% levy on all imports and 60% on anything coming from China. Barclays estimates that’d amount to an average 17% tax on foreign goods – a level not seen since the 1930s. And that would mean higher prices for American consumers, a fresh run of inflation, and a new challenge for the Fed.

What’s going on here?

Investors poured record sums into exchange-traded funds (ETFs) that spread money equally across S&P 500 firms last year, suggesting they don’t see Big Tech leading the pack forever.

What does this mean?

The S&P 500 comprises 500 companies, but it’s far from balanced: just seven dominate, making up a third of the index. That’s been a win for investors in recent years, with the “Magnificent Seven” tech firms driving the S&P 500’s impressive returns. But recently, folks have been hedging their bets. In the second half of 2024, they threw more than $14 billion into the Invesco S&P 500 Equal Weight ETF. And it’s not hard to see why. Tech stocks may be riding high now, but their lofty valuations assume near-perfect performances – and history shows that’s tough to sustain. Meanwhile, other sectors – like industrials, energy, and financials – are poised to shine if the economy indeed sees higher interest rates and stronger growth.

Why should I care?

For markets: Swimming upstream.

With the S&P 500‘s current weightings, Goldman Sachs sees the index delivering yearly returns of just 3% over the next decade – way below its usual pace. But peel away the heavy tech focus, and Goldman sees returns jumping up to 11%. And sure, avoiding the “magnificent” stocks might feel counterintuitive now, but the potential reward could be worth the risk.

For you personally: Mean market plays.

Equal-weight strategies aren’t just about spreading your risk evenly across company sizes and sectors: they’re also a clever way to take advantage of market mood swings. By keeping your weightings equal – periodically trimming your winners and topping up your underdogs – you can maintain a natural “buy low, sell high” approach. This contrarian move taps into mean-reversion – the idea that an asset’s price tends to snap back to the middle over time – and can explain why equal-weighted trackers have actually outperformed the S&P 500 over the long term.