You’re probably weary of the endless chatter about the Federal Reserve. I am, for sure. But we have no choice but to tune in, given the central bank’s enormous clout.

This week, the economic agenda is relatively sparse, with the spotlight on Friday’s release of the core personal consumption expenditures (PCE) inflation index, the Fed’s favored inflation gauge.

Early signals from consumer and producer prices suggest a cooling in inflation, hinting that the Fed might finally consider an interest rate cut post-summer. Yes, it’s more Fed-related news, but it’s the drama we can’t afford to ignore.

Projections indicate that core PCE may decelerate to a 0.1% increase for May, marking the slowest monthly rise this year and pulling the annual inflation rate down to 2.6%. Should this forecast materialize, it would represent the most modest year-over-year inflation since March 2021.

Current market sentiment assigns a 64% likelihood to a rate cut in September, followed by another in December. This scenario appears plausible, contingent upon the next three inflation reports leading up to the September Federal Open Market Committee (FOMC) meeting.

Regardless of whether the Fed enacts one or two cuts this year, the broader perspective is that the Fed may be entering a prolonged phase of rate reductions to normalize monetary policy.

Also on the radar this week are political events. The first U.S. presidential debate between Joe Biden and Donald Trump is scheduled for Thursday, and the initial round of the French parliamentary elections will take place on Sunday.

Wall Street is typically inured to political theater, but the stakes in this year’s U.S. election are enormous.

As June nears its end, the month is poised to conclude on a positive note, adding to the year’s robust equity performance. However, gains in the second quarter have been unevenly distributed, with artificial intelligence (AI)-driven stocks and large-cap technology companies leading the charge. The top 10 largest companies in the S&P 500 now constitute 37% of the index, the highest concentration in three decades.

This trend underscores two key points: the vibrancy of innovation, particularly in AI, which promises to enhance productivity across various sectors, and the significant earnings growth of tech giants propelling their market dominance.

Conversely, the ascendancy of tech this year also highlights the importance of diversification to mitigate portfolio risk if a particular investment strategy loses favor.

This week’s slump in the share price of Nvidia (NSDQ: NVDA) was to be expected after the chipmaker’s rapid appreciation, but it nonetheless reminds investors of the dangers of FOMO (fear of missing out).

When investors chase after hot stocks driven by hype and momentum rather than fundamentals, they expose themselves to significant risks. The herd mentality can lead to inflated valuations, making stocks susceptible to sharp corrections when the enthusiasm wanes.

High-flying tech stocks currently trade at premium valuations. Nvidia remains an inherently strong company, but its recent correction highlights the volatility of the tech sector, especially when we’re seeing exuberance over a certain segment such as AI. It’s always important to evaluate stocks based on sound financial metrics and realistic growth expectations and not just on thematic considerations alone.

The good news is that the NASDAQ continues to hover above its 20-, 50-, and 200-day moving averages (see chart):

The main U.S. stock market indices closed mixed Tuesday as follows:

• DJIA: -0.76%
• S&P 500: +0.39%
• NASDAQ: +1.26%
• Russell 2000: -0.42%

Nvidia and the NASDAQ bounced back from Monday’s swoon. For Nvidia, Tuesday marked a rebound from a three-session selloff.

While the tech rally may eventually pause, there is potential for other market sectors to catch up. As positive earnings momentum extends to other industries in the latter half of the year and the Fed executes its anticipated rate cut, market leadership is poised to become more diversified.

The laggards of 2023 (e.g., utilities) are set to become the leaders of 2024. Calibrate your portfolio accordingly.

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John Persinos is the editorial director of Investing Daily.

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