Are rate cuts priced in?

After much speculation, the Federal Reserve finally seems committed to cutting interest rates, with traders pegging the probability of a rate cut in September at 100%. In the days following the news, big tech sold off while the Russell 2000 small caps outperformed.

The Russell 2000 looks like it's breaking out of the ~190-210 range. 

The Nasdaq ETF QQQ had a bearish breakdown from a rising wedge.

The question is: is this the start of a new trend or a short lived head fake? I think it's a new trend.

Mega cap tech has lead the market for much of recent memory. The cloud, AI, subscriptions, valuable data and the essential nature of their devices makes big tech's place in society seem bulletproof. On top of that, huge share buybacks and dividends provide a high floor to their share price. A dot com crash for big tech scenario seems unlikely - the business models are too proven.

And looking at the bigger picture - inflation cooling and the federal reserve pivoting toward rate cuts - it's hard to be too bearish on big tech or the market overall. 

With that being said, market breadth is still fairly poor. The equal weighted QQQ is up 75% while weighted QQQ is up 149% over the past five years. A regression to the mean seems likely and we've seen that in previous rate hike cycles.

During the height of the covid pandemic, the fed's balance sheet increased dramatically. The ease of borrowing money led to a boom in speculative and unprofitable stocks, such as GME, AMC and the ARK stocks. This rate cut cycle will likely be nowhere near as dramatic as the last one, so the winners will be harder to come by. But small caps and some of the more speculative names may lead the next phase of this market. 

Plug Power, Zillow, FuboTV, and Lyft are some of the names that I see leading the charge.