Stocks Pressured on the Prospect of Higher for Longer Interest Rates

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.34%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.23%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.70%. 

US stock indexes Wednesday settled mixed. Stock prices whipsawed higher Wednesday afternoon after bond yields tumbled when Fed Chair Powell said it was unlikely that the next policy rate move by the Fed would be a rate hike.  However, the broader market gave up its advance and turned lower into the close on the prospect of higher for longer interest rates. 

The overall market was also under pressure after Wednesday’s report on the Apr ADP employment change rose more than expected, which signals strength in the US labor market that reinforces the case for the Fed to hold off on interest rate cuts.  Also, an unexpected increase in the Apr ISM prices paid sub-index to a 1-3/4 year high signals persistent price pressures that are hawkish for Fed policy.

Corporate earnings results Wednesday were mixed.  On the negative side, CVS Health Corp closed down more than -16% after reporting weaker-than-expected Q1 adjusted EPS and cutting its full-year adjusted EPS forecast. Also, Starbucks closed down more than -15% after reporting an unexpected decline in Q2 comparable sales.  In addition, Super Micro Computer closed down more than -14% after reporting weaker-than-expected Q3 net sales.

On the positive side, Bio-Techne rose more than +16% after reporting better-than-expected Q3 net sales. Also, Garmin Ltd closed up more than +13% after reporting Q1 revenue above consensus.  In addition, Amazon.com closed up more than +2% after reporting stronger-than-expected Q1 net sales.

Q1 earnings results have been mostly better than expected, a supportive factor for stocks.  Q1 earnings are now expected to climb +4.7% from a year ago, compared with the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of the S&P 500 companies that have already reported have beaten Q1 earnings estimates. 

The FOMC, as expected, kept the fed funds target range unchanged at 5.25%-5.50% and said, "In recent months, there has been a lack of further progress toward the FOMC's 2% inflation objective." 

The FOMC said it will slow the pace of its balance sheet runoff, or quantitative tightening, saying it will cut the cap on runoff for Treasuries in its portfolio to $25 billion a month from $60 billion beginning in June.  The FOMC also said its cap for mortgage-backed securities (MBS) will remain unchanged at $35 billion a month and it will begin to invest any principal payments above the cap into Treasuries instead of MBS starting in June. 

Fed Chair Powell said, "It will probably take longer than previously expected" for the Fed to gain enough confidence about the inflation trajectory to start cutting interest rates.  He added that "it's unlikely that the next policy rate move will be a hike" in interest rates.

Weekly US MBA mortgage applications fell -2.3% in the week ended April 26.  The purchase mortgage sub-index fell -1.7% and the refinancing sub-index fell -3.3%.  The average 30-year fixed rate mortgage rose +0.05 bp to 7.29% from 7.24% in the prior week.

The US Apr ADP employment change rose +192,000, stronger than expectations of +183,000.  Also, Mar was revised upward to +208,000 from the previously reported +184,000.

The US Mar JOLTS job openings fell -325,000 to a 3-year low of 8.488 million, showing a weaker labor market than expectations of 8.680 million.

The US Apr ISM manufacturing index fell -1.1 to 49.2, weaker than expectations of 50.0.  The Apr ISM prices paid sub-index unexpectedly rose +5.1 to a 1-3/4 year high of 60.9 versus expectations of a decline to 55.4. 

US Mar construction spending unexpectedly fell -0.2% m/m, weaker than expectations of a +0.3 % m/m increase.

The markets are discounting the chances for a -25 bp rate cut at 2% for Wednesday’s FOMC meeting and 10% for the following meeting on June 11-12.

Overseas stock markets Wednesday settled lower.  The Euro Stoxx 50 is closed today for the May Day holiday.  China's Shanghai Composite was closed for the Labor Day holiday.  Japan's Nikkei Stock Index closed down -0.34%. 

Interest Rates

June 10-year T-notes (ZNM24) on Wednesday closed up +21.5 ticks.  The 10-year T-note yield fell -6.4 bp to 4.616%.  Jun T-notes Wednesday rallied to a 1-week high, and the 10-year T-note yield fell to a 1-week low of 4.577%.  Weaker than expected US economic news on the Mar JOLTS job openings and the Apr ISM manufacturing index boosted T-notes.  Also, a decline in inflation expectations was bullish for T-notes after the 10-year breakeven inflation rate fell to a 1-1/2 week low Wednesday at 2.343%. 

Gains in T-notes accelerated Wednesday afternoon after Fed Chair Powell said it was “unlikely” that the next rate move by the Fed would be a rate hike. T-notes also found support after the Fed said it would taper its asset runoff, or quantitative tightening, by cutting the cap on runoff for Treasuries in its portfolio to $25 billion a month from $60 billion beginning in June. 

European government bond yields Wednesday finished higher. The 10-year German bund did not trade Wednesday, with markets closed for the Labor Day holiday.  The 10-year UK gilt yield rose +1.9 bp at 4.366%.

US Stock Movers

CVS Health Corp (CVS) closed down more than -16% to lead losers in the S&P 500 after reporting Q1 adjusted EPS of $1.31, weaker than the consensus of $1.69, and cutting its full-year adjusted EPS forecast to $7.00 from a prior forecast of $8.30 and well below the consensus of $8.29. 

Starbucks (SBUX) closed down more than -15% to lead losers in the Nasdaq 100 after reporting Q2 comparable sales unexpectedly fell -4%, weaker than expectations of an increase of +1.46%. 

Super Micro Computer (SMCI) closed down more than -14% after reporting Q3 net sales of $3.85 billion, weaker than the consensus of $3.86 billion.

Skyworks Solutions (SWKS) closed down more than -14% after forecasting Q3 adjusted EPS of $1.21, weaker than the consensus of $1.47. 

Estee Lauder (EL) closed down more than -13% after cutting guidance on its full-year sales forecast to a decline of -2% to -3% from a previous view of -1% to up +1%.

Advanced Micro Devices (AMD) closed down more than -8% after forecasting Q2 revenue of $5.4 billion-$6.0 billion, the midpoint below the consensus of $5.72 billion. 

Kraft Heinz (KHC) closed down more than -6% after reporting Q1 net sales of $6.41 billion, below the consensus of $6.43 billion. 

Clorox (CLX) closed down more than -5% after reporting Q3 net sales of $1,81 billion, weaker than the consensus of $1.87 billion.

Bio-Techne (TECH) closed up more than +16% to lead gainers in the S&P 500 after reporting Q3 net sales of $303.4 million, stronger than the consensus of $292.3 million.

Garmin Ltd (GRMN) closed up more than +13% after reporting Q1 revenue of $1.38 billion, above the consensus of $1.25 billion.

DuPont de Nemours (DD) closed up more than +8% after reporting Q1 adjusted EPS of 79 cents, stronger than the consensus of 65 cents, and raising its full-year adjusted EPS estimate to $3.45-$3.75 from a previous estimate of $3.25-$3.65.

Verisk Analytics (VRSK) closed up more than +6% to lead gainers in the Nasdaq 100 after reporting Q1 adjusted EPS of $1.63, better than the consensus of $1.52.

Johnson & Johnson (JNJ) closed up more than +4% to lead gainers in the Dow Jones Industrials after it announced an $11 billion settlement that would resolve pending talc-based power lawsuits, an amount that Leerink Partner said was less than feared.

Amazon.com (AMZN) closed up more than +2% after reporting Q1 net sales of $143.31 billion, above the consensus of $142.59 billion, and said revenue at its Web Services cloud unit has risen to a $100 billion annual revenue run rate.

Pinterest (PINS) closed up more than +20% after reporting Q1 revenue of $740.0 million, well above the consensus of $700.3 million, and forecasting Q2 revenue of $835 million-$850 million, better than the consensus of $828.2 million. 

Automatic Data Processing (ADP) closed up more than +2% after reporting Q3 revenue of $5.30 billion, stronger than the consensus of $5.22 billion.

Earnings Reports (5/2/2024)

AES Corp/The (AES), Alliant Energy Corp (LNT), Ameren Corp (AEE), AMETEK Inc (AME), Amgen Inc (AMGN), Apple Inc (AAPL), Aptiv PLC (APTV), Baxter International Inc (BAX), Becton Dickinson & Co (BDX), Booking Holdings Inc (BKNG), BorgWarner Inc (BWA), Camden Property Trust (CPT), Cardinal Health Inc (CAH), Church & Dwight Co Inc (CHD), Cigna Group/The (CI), ConocoPhillips (COP), Consolidated Edison Inc (ED), Coterra Energy Inc (CTRA), Cummins Inc (CMI), DaVita Inc (DVA), Digital Realty Trust Inc (DLR), Dominion Energy Inc (D), EOG Resources Inc (EOG), Exelon Corp (EXC), Expedia Group Inc (EXPE), Federal Realty Investment Trust (FRT), Fortinet Inc (FTNT), Hologic Inc (HOLX), Howmet Aerospace Inc (HWM), Huntington Ingalls Industries (HII), Illumina Inc (ILMN), Ingersoll Rand Inc (IR), Intercontinental Exchange Inc (ICE), IQVIA Holdings Inc (IQV), Iron Mountain Inc (IRM), Kellanova (K), Kimco Realty Corp (KIM), Linde PLC (LIN), Live Nation Entertainment Inc (LYV), Moderna Inc (MRNA), Monster Beverage Corp (MNST), Moody's Corp (MCO), Motorola Solutions Inc (MSI), Parker-Hannifin Corp (PH), Pinnacle West Capital Corp (PNW), Pioneer Natural Resources Co (PXD), Quanta Services Inc (PWR), Regency Centers Corp (REG), Regeneron Pharmaceuticals Inc (REGN), Southern Co/The (SO), Stanley Black & Decker Inc (SWK), Targa Resources Corp (TRGP), Teleflex Inc (TFX), Vulcan Materials Co (VMC), Westrock Co (WRK), Xylem Inc/NY (XYL), Zimmer Biomet Holdings Inc (ZBH), Zoetis Inc (ZTS).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.