Stocks Sink on Concern the Fed Will Keep Interest Rates Higher for Longer

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -1.57%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.49%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.92%. 

US stock indexes Tuesday finished sharply lower. Signs of persistent wage pressure pushed bond yields higher Tuesday and weighed on stocks after the US Q1 employment cost index rose more than expected, a hawkish factor for Fed policy.  Stock indexes extended their losses Tuesday afternoon on long liquidation ahead of the results of the 2-day FOMC meeting Wednesday, and the potential for Fed Chair Powell to signal the Fed will keep interest rates higher for longer.   

Corporate earnings results Tuesday were mixed for stocks.  GE Healthcare tumbled more than -14% after reporting weaker-than-expected Q1 adjusted Ebitda.  Also, Molson Coors Beverage closed down more than -9% after management said it has grown “incrementally more cautious” on its outlook for the year, given early April industry performance.  In addition, Warner Bros Discovery closed down more than -9% after the Wall Street Journal reported that Comcast is seeking to replace Warner Bros as one of the broadcast partners for the National Basketball Association. 

On the positive side, Leidos Holdings closed up more than +6% after reporting stronger-than-expected Q1 revenue and raising its full-year revenue forecast.   Also, Eli Lilly closed up more than +5% after raising its full-year revenue estimate. In addition, NXP Semiconductors closed up more than +3% after reporting stronger than expected Q1 adjusted EPS and forecasting Q2 adjusted EPS above consensus.

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 US Q1 employment cost index rose +1.2% q/q, stronger than expectations of +1.0% q/q.

The US Feb S&P CoreLogic composite-20 home price index rose +6.38% y/y, right on expectations and the largest increase in 15 months.

The US Apr MNI Chicago PMI unexpectedly fell -3.5 to 37.9, weaker than expectations of an increase to 45.0 and the steepest pace of contraction in 17 months.

The Conference Board US Apr consumer confidence index fell -6.1 to a 1-3/4 year low of 97.0, weaker than expectations of 104.0.

Mixed economic activity in China may weigh on global growth prospects and is negative for stocks.  Tuesday’s news showed that China's April manufacturing PMI fell from 0.4 to 50.4, slightly better than expectations of 50.3. However, the China Apr non-manufacturing PMI fell -1.8 to 51.2, weaker than expectations of 52.3.   

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 Tuesday settled mixed.  The Euro Stoxx 50 closed down -0.59%.  China's Shanghai Composite closed down -0.26%.  Japan's Nikkei Stock Index rose to a 2-week high and closed up +1.24%. 

Interest Rates

June 10-year T-notes (ZNM24) on Tuesday closed down -16.5 ticks.  The 10-year T-note yield rose +6.8 bp to 4.682%.  T-notes prices retreated Tuesday due to higher-than-expected US labor costs after the Q1 employment index rose more than expected, a hawkish factor for Fed policy.  T-notes are also weighed down on negative carryover from Monday afternoon when the Treasury said its Q2 net borrowing would be $243 billion, well above a January estimate of $202 billion, signaling increased government debt sales this quarter.  In addition, expectations that the FOMC and Fed Chair Powell on Wednesday will signal that interest rates will remain higher for longer weighed on T-note prices.

European government bond yields Tuesday moved higher.  The 10-year German bund yield rose +5.1 bp at 2.584%.  The 10-year UK gilt yield rose +5.5 bp at 4.347%.

Eurozone Q1 GDP rose +0.3% q/q and +0.4% y/y, stronger than expectations of +0.1% q/q and +0.2% y/y.

Eurozone Apr CPI was unchanged from Mar at +2.4% y/y, right on expectations.  The Apr core CPI eased to a 2-year low of +2.7% y/y from +2.9% y/y in Mar.

German Mar retail sales rose +1.8% m/m, stronger than expectations of +1.4% m/m and the largest increase in 2-1/4 years.

ECB Governing Council member Villeroy de Galhau said Eurozone inflation data for April give the ECB confidence to begin cutting interest rates in June before continuing to loosen monetary policy at a pragmatic pace.

US Stock Movers

GE Healthcare (GEHC) closed down more than -13% to lead losers in the S&P 500 and Nasdaq 100 after reporting Q1 adjusted Ebitda of $681 million, below the consensus of $697.3 million. 

F5 Inc (FFIV) closed down more than -9% after forecasting Q2 adjusted EPS of $2.89-$3.01, weaker than the consensus of $3.07.

Molson Coors Beverage (TAP) closed down more than -9% after management said it has grown “incrementally more cautious” on its outlook for the year, given early April industry performance.

Warner Bros Discovery (WBD) closed down more than -9% after the Wall Street Journal reported that Comcast is seeking to replace Warner Bros as one of the broadcast partners for the National Basketball Association. 

Stellantis (STLA) closed down more than -9% after reporting Q1 vehicle sales fell -10% y/y to 1.34 million units, weaker than the consensus of 1.47 million. 

Paccar (PCAR) closed down more than -6% after forecasting a full-year CAPEX of $700 million-$750 million, the midpoint below the consensus of $728.9 million.

Tesla (TSLA) closed down more than -5% after the Information reported that CEO Musk is planning hundreds more job cuts across the company after two more senior executives would be leaving. 

Sysco Co (SYY) closed down more than -3% after reporting Q3 sales of $19.40 billion, below the consensus of $19.73 billion.

Leidos Holdings (LDOS) closed up more than +6% to lead gainers in the S&P 500 after reporting Q1 revenue of $4.0 billion, above the consensus of $3.82 billion, and raising its full-year revenue forecast to $16.0 billion-$16.4 billion from a previous forecast of $15.7 billion-$16.1 billion.

Eli Lilly (LLY) closed up more than +5% after raising its full-year revenue estimate to $42.4 billion-$43.6 billion from a prior view of $40.4 billion-$41.6 billion. 

Trane Technologies Plc (TT) closed up more than +5% after raising its full-year adjusted continuing operations EPS to $10.40-$10.50 from a previous estimate of $10.00-$10.30.   

Corning (GLW) closed up more than +5% after reporting Q1 core sales of $3.26 billion, better than the consensus of $3.12 billion, and forecasting Q3 core sales of about $3.40 billion, stronger than the consensus of $3.33 billion.

Zebra Technologies (ZBRA) closed up more than +4% after reporting Q1 adjusted EPS of $2.84, well above the consensus of $2.45.

NXP Semiconductors (NXPI) closed up more than +3% to lead gainers in the Nasdaq 100 after reporting Q1 adjusted EPS of $3.24, stronger than the consensus of $3.18 and forecast Q2 adjusted EPS of $3.00-$3.41, the midpoint above the consensus of $3.12.    

3M Co (MMM) closed up more than +4% to lead gainers in the Dow Jones Industrials after forecasting dull-year EPS of $6.80-$7.30 and said it expects to pay a dividend of about 40% of its adjusted free cash flow.   

Arch Capital Group Ltd (ACGL) closed up more than +2% after reporting Q1 operating EPS of $2.45, stronger than the consensus of $2.07. 

Earnings Reports (5/1/2024)

Aflac Inc (AFL), Albemarle Corp (ALB), Allstate Corp/The (ALL), American International Group I (AIG), American Water Works Co Inc (AWK), ANSYS Inc (ANSS), APA Corp (APA), Automatic Data Processing Inc (ADP), Bio-Techne Corp (TECH), CDW Corp/DE (CDW), Cencora Inc (COR), CF Industries Holdings Inc (CF), CH Robinson Worldwide Inc (CHRW), Cognizant Technology Solutions (CTSH), Corteva Inc (CTVA), CVS Health Corp (CVS), Dayforce Inc (DAY), Devon Energy Corp (DVN), DuPont de Nemours Inc (DD), eBay Inc (EBAY), Estee Lauder Cos Inc/The (EL), Etsy Inc (ETSY), Eversource Energy (ES), First Solar Inc (FSLR), Garmin Ltd (GRMN), Generac Holdings Inc (GNRC), Global Payments Inc (GPN), Host Hotels & Resorts Inc (HST), IDEXX Laboratories Inc (IDXX), Johnson Controls International (JCI), Kraft Heinz Co/The (KHC), Marathon Oil Corp (MRO), Marriott International Inc/MD (MAR), Mastercard Inc (MA), MetLife Inc (MET), MGM Resorts International (MGM), Mid-America Apartment Communities (MAA), Monolithic Power Systems Inc (MPWR), Mosaic Co/The (MOS), Norwegian Cruise Line Holdings (NCLH), Paycom Software Inc (PAYC), Pfizer Inc (PFE), PPL Corp (PPL), PTC Inc (PTC), Qorvo Inc (QRVO), QUALCOMM Inc (QCOM), Ventas Inc (VTR), Verisk Analytics Inc (VRSK), VICI Properties Inc (VICI), WEC Energy Group Inc (WEC), Yum!  Brands Inc (YUM).

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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.