Stocks closed sharply higher on Friday with all of the major indexes gaining 1% or greater.

But it was an uneven week as the market rotation was in full force again. The Nasdaq and S&P 500 were both down for the week, as they were the ones people were rotating out of (due to their exposure to big-tech/AI names); while the small-cap Russell 2000, the mid-cap S&P 400, and even the Dow, were all up for the week, as those were the ones investors were rotating into.

This was part market rotation and part breadth expansion.

But don't count out big-tech/AI names, or large-caps for that matter, for long. The lightening up of these over-crowded, over-allocated names is just that. Not an abandonment. The AI boom is here to stay. And it?s likely a multi-year boom, if not longer.

And with more money now being diversified into many other well-deserving stocks and industries that have been virtually ignored for much of this year so far, this should lead to a new leg up not just for small-caps, but for all market-cap sizes.

Friday's Personal Consumption Expenditures (PCE) index, once again, showed inflation continuing to ease. At a slower pace. But progress nonetheless. The headline number was up 0.1% m/m vs. last month's 0.0% and in line with the consensus, while the y/y rate came in at 2.5%, as expected, and under last month's 2.6%. The core rate (ex-food & energy) was up 0.2% m/m, up a bit from last month's 0.1% pace and views for the same, while the core rate came in at 2.6%, in line with last month's 2.6%, although slightly ahead of estimates for 2.5%.

And it reminded investors that the likelihood of a soft landing, and the prospect of rate cuts coming in a couple of months, is still intact.

Nobody is expecting the Fed to cut rates this week when they give their FOMC Announcement on Wednesday 7/31 (followed by Fed Chair Jerome Powell's customary press conference shortly thereafter). And it's possible that the September timeline gets pushed out to November given Q2's stronger than expected GDP. But the odds are still calling for 1 rate cut this year, and maybe even 2.

In other news, Friday's Consumer Sentiment Index improved to 66.4 vs. last month's 66.0 and views for the same.

Today we'll get the Dallas Fed Manufacturing Index.

But the report everybody is really waiting for is Friday's (8/2) Employment Situation report. A combination of easing inflation and a weakening labor market from the overly tight conditions, we've seen for too long, is the ideal situation to give the Fed the confidence they desire to cut rates sooner rather than later.

In the meantime, earnings season heats up this week with another 1,210 companies set to report with marquee names like McDonald's and ON Semiconductor on deck for today, Microsoft and Advanced Micro Devices in queue for tomorrow, Meta and ARM Holdings on Wednesday, Apple and Amazon on Thursday, and Berkshire Hathaway and Exxon Mobile on Friday.

And we'll see if the S&P and Nasdaq can make up some of their recently lost ground this week, while the small-caps, mid-caps, and even the Dow, try to extend their recent gains.

See you tomorrow,