Wall Street's summer phrase of the season.

The central theme dominating Wall Street this summer.

A current version of this story originally appeared in CNN Business' "Before the Bell" newsletter.

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This word is making an appearance in analyst notes, earnings calls, and even at CNN.

Why?

It captures the confusing economic landscape in the United States at the moment.

Individuals with higher income are continuing to spend on services like dining out, films, and costly products. However, Federal Reserve statistical data indicates that around 80% of American households possess less money to expend in comparison to 2019. These individuals are shouldering the brunt of this.

To sum up: Wealthy individuals are keeping the economy running, but resources are dwindling.

Coincidentally, markets have developed their own division: Mammoth stocks like Nvidia are thriving, while small-cap organizations encounter difficulties. Frothy markets tend to be viewed with apprehension by financiers.

I had the opportunity to speak with Scott Wren, the senior global equity strategist at Wells Fargo, about this popular term and the implications for the economy and markets in the future.

Below is an excerpt from our conversation, edited for length and clarity.

Before the Bell: Last week was a peculiar week for markets. What's happening?

Scott Wren: It was an odd week because a variety of economic data reports surpassed expectations. I believe we're in a delicate phase where positive economic data works against the market due to Federal Reserve implications.

I've been engaged in the industry for almost four decades, and the current instance of pumping rate hikes out of the Fed without inducing a recession is a pretty uncommon event. I might criticize them for deferring rate lifts for too long, but I appreciate they're managing it pretty well. The means for the Fed to continue accomplishing this is to not reduce rates prematurely.

We predict that CPI will fall under 3% in the season finale, which will give the Fed the potential to cut rates. However, expectations on the market expects rate reductions this year and another next year. For now, the belief holds that good news for the economy doesn't equate to positive news for the market.

It's all about inflation, and while the wealthiest segment of Americans continue squandering cash, there are many citizens in the lower earning category struggling. Consumer denominator may marginally increase, but certainly not significantly over the next 6 months.

You mention "bifurcation" – it's the buzzword of the season.

I'm not fond of the word, but I use it as well. It's become the vocabulary of the moment, but it's true. We're dealing with an array of divisions, for instance, high-income earners versus low-income earners; and large-cap stocks excelling over small-cap stocks.

It's been attracting attention of analysts at this moment. Why now?

I'm told by our economists that, during the last few years, consumer spending has been vastly invested in upper-income echelons. But our analysts confirm that this growth will not be enough to sustain the economy.

In lower-income groups, individuals have resorted to tapping their 401(k)s and home equity lines. The utilization of credit cards is prevalent as well. But I foresee that these strategies will soon come to an end. Therefore, I forecast a decrease in consumer spending. Even though the elite earners will continue to spend, their indulgence is becoming increasingly particular.

At the very least, I expect the unemployment rate to edge right past 4%. In addition, the pace of spending on services is predicted to falter.

When expecting a usual recessionary period, one might assume it would occur. But with the ongoing deficit spending, it appears we're predestined for a slowdown rather than a recession.

I'd like to delve deeper into the divergence occurring in stock markets. Historically, in the mid-point of downturns or recessions, small caps display outperformance. For nearly eight or six cycles, this pattern emerged. However, with the current circumstances, I'm doubtful about that reoccurring. Small caps have less robust balance sheets and threadbare cash flow. Moreover, they encounter a lack of credit availability and hiked costs.

As we approach mid-2025 and anticipate global rejuvenation, small caps in the US may commendably showcase growth. Nevertheless, this growth may not be as intense as in previous cycles. Glancing at the next few months, it's challenging to foresee small-cap stocks overtaking large-cap equivalents.

In the past, post-slowdown or recessionary eras, small caps overcame the market. Currently, though, their financial health isn't stellar, thus making their progress uncertain.

Elon Musk’s xAI Witnesses Financial Strengthening

In an intriguing acquisition of funds, xAI, the AI startup founded by Elon Musk, received a $6 billion top-up investments from conglomerates like Silicon Valley venture capitalists and Saudi Prince Alwaleed Bin Talal, surging the company's worth to $24 billion. Anna Cooban, a colleague, provided these details.

The original capitalization of the startup existed before these latest investments. xAI announced this on their blog post on Sunday.

Musk, who founded xAI in 2022, commented on Twitter about more updates in ensuing weeks. The current valuation of $24 billion is an increase from the $18 billion value the startup had before obtaining these fresh capital contributions.

xAI delineated how the money will be utilized, stating that it will be directed to bring their initial projects to market, establish advanced infrastructure, and expedite research and development for forthcoming technological advancements.

The funding thrusts the establishment as a potential foe of OpenAI, a prominent AI research association behind the widely acclaimed ChatGPT chatbot. Musk co-founded OpenAI, but severed ties six years ago due to differences over the company's course.

In November, xAI introduced "Grok," an AI-driven chatbot they developed for X, the rebranded Twitter owned by Musk. Musk argued that Grok was being educated through "real-time access" to information on X at the time.

China Ups Stakes in Chip Industry

Despite American efforts to impede China's attempted dominance in advanced future technologies by restricting exporting of American chips and chip technology, Beijing's ambitions persist. To expedite this goal, China has established its largest-scale semiconductor state investment fund, as per information issued by a governmental agency.

Valued at $47.5 billion, the fund constitutes the third phase of the China Integrated Circuit Industry Investment Fund. This fund officially materialized in Beijing on Friday, according to the National Enterprise Credit Information Publicity System.

This latest fund showcases China's unwavering commitment to its goal of becoming a global pioneer in a multitude of industries, such as artificial intelligence, 5G wireless, and quantum computing, via the Made in China 2025 roadmap.

Regardless of these US curbs, China's relentless determination to thrive as a tech behemoth continues. This colossal investment serves as another step in supporting the leadership of Xi Jinping to fortify their ranks as a technological titan.

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In the context of the economic landscape, investors are closely watching the divide between prosperous businesses and struggling ones, a trend often referred to as bifurcation. This split is evident in the performance of large-cap stocks, like Nvidia, versus small-cap organizations.

Given the current state of the market, where positive economic data might not translate into market success, businesses and investors are closely monitoring this bifurcation to make informed decisions.

Source: edition.cnn.com