The geopolitical picture is mixed at best. The equity rally has sufficient fuel to continue, but investors should brace for a volatile second half of 2024.

The recent swoon in technology stocks is a case in point. Tech stocks have taken it on the chin lately, largely due to the U.S. government’s potential plans to impose stricter trade regulations on firms exporting semiconductor equipment to China.

This geopolitical tension has cast a shadow over the tech industry, raising concerns about supply chain disruptions and market access.

During this wild and woolly U.S. presidential election season, “economic populism” is again in vogue. Both the Republican and Democratic parties are spouting protectionist rhetoric. Chipmaker stocks have borne the brunt so far, weighing on both the S&P 500 and NASDAQ.

In Asia, market performances have been mixed due to this trade uncertainty, while European markets have seen a lift due to U.K. inflation figures that exceeded expectations.

Investor sentiment in Europe also has gotten a bullish impetus from the defeat of the Conservatives in Britain and the far-right in France. In America, meanwhile, the ascendancy of Donald Trump has Western allies biting their nails.

Small- and mid-cap stocks, after a strong rally in recent months, have experienced a pause. However, their performance over the past week has been notable. Small-cap stocks, which had a modest 1% increase in the first half of the year, surged significantly in recent days, achieving an approximate 11% gain year-to-date. Mid-cap stocks have similarly performed well, now up around 9% year-to-date.

The upswing in small- and mid-cap stocks was triggered by lower-than-expected inflation data, with core consumer price index (CPI) inflation rising by just 3.3% in June, the lowest rate since April 2021. This positive inflation report has shifted market expectations towards two to three Federal Reserve rate cuts in 2024, compared to just one expected in late May.

Small- and mid-cap companies typically carry higher debt levels compared to their larger counterparts. Consequently, reductions in interest rates typically improve their profitability by lowering their interest expenses. If inflation continues to decrease and the Fed is able to cut rates while maintaining economic growth, small- and mid-cap stocks should see sustained benefits in the coming months.

Meanwhile, back home…

Housing is a bellwether sector and it showed signs of improvement for June. Housing starts increased to a seasonally adjusted annual rate of 1.35 million, surpassing both the previous reading of 1.31 million and expectations of 1.3 million (see chart).

Building permits, an indicator of future construction activity, also rose to a seasonally adjusted annual rate of 1.45 million, higher than the May figure of 1.4 million and exceeding consensus expectations of 1.39 million.

Despite these gains from May to June, both housing starts and permits were lower on a year-over-year basis due to higher interest rates impacting housing activity. Anticipated Fed rate cuts in the coming months could lower interest rates, potentially revitalizing residential construction activity.

The Silicon Valley behemoths take a breather…

Mega-cap tech stocks have been trading at high valuations, driven by strong growth expectations and the continuing mania over artificial intelligence (AI). Stretched valuations have made these stocks vulnerable to any negative news or shifts in market sentiment.

The potential tightening of trade restrictions and other geopolitical risks have highlighted the fragility of these high valuations, suggesting that a correction or a period of slower growth was to be expected.

On Thursday, the main U.S. stock market indices closed sharply lower as follows:

• DJIA: -1.29%
• S&P 500: -0.78%
• NASDAQ: -0.70%
• Russell 2000: -1.85%

The dumping of mega-cap tech names continued, but the selloff wasn’t restricted to tech. All but one of the 11 S&P 500 sectors finished in the red. Despite Thursday’s slump, the small-cap Russell 2000 has climbed 7% over the last five trading sessions. Rotation has hit a speed bump, but it appears to still have momentum.

Read This Story: Artificial Intelligence: Resistance Is Futile

Editor’s Note: As I’ve just explained, AI remains a huge investment opportunity, but you need to be wary of high valuations and media hype.

Perhaps you’re eyeing the Big Tech stalwarts that are making massive investments in AI. Well, they’re obvious plays on the trend and they’ve been trading at lofty heights.

How can you safely invest in AI? Consider the advice of my colleague Robert Rapier.

Robert Rapier is an income investing legend. He’s the chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert has found a better way to make money from the AI super-boom, thanks to a group of under-the-radar tech plays. Robert is locked in on AI right now because of the incredible income opportunities it has created. To learn more, click here.

John Persinos is the editorial director of Investing Daily.

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