Stocks Close Mildly Higher on Q1 Earnings Optimism

What you need to know…

The S&P 500 Index ($SPX) (SPY) Monday closed up +0.33%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.30%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.06%.

Stock indexes Monday posted moderate gains.  An increase in M&A activity was positive for stocks after Merck said it would acquire Prometheus Biosciences for around $10.8 billion.  Stocks also received a lift from hopes that Q1 earnings might be better than expected after last Friday’s big bank earnings were stronger than expected. 

However, chip stocks retreated and limited gains in the Nasdaq 100 after a report said Taiwan Semiconductor Manufacturing, the world’s biggest contract manufacturer of chips, is planning to cut its capital expenditures.  Also, a -2% decline in crude prices Monday weighed on energy stocks.

Expectations for the Fed to keep raising interest rates pushed bond yields higher Monday and weighed on the overall market.  Bond yields moved higher on the rise in inflation expectations to a 2-week high and on the strong Empire and NAHB reports.  The market has priced in an 88% chance for a 25 bp rate hike at the May 2-3 FOMC meeting.

On the positive side, Prometheus Biosciences rallied +69% after Merck struck a deal to acquire the company for around $10.8 billion. Also, M&T Bank closed up more than +7%, and Charles Schwab closed up more than +3% after reporting better-than-expected Q1 net interest revenue. 

On the negative side for stocks, Alphabet closed down more than -2% after the New York Times reported that Microsoft’s Bing might replace Alphabet’s Google as the default search service on Samsung electronic devices.  Also, State Street closed down more than -9% after reporting an unexpected contraction in Q1 net flows.

The U.S. Apr Empire manufacturing survey general business conditions index rose +35.4 to a 9-month high of 10.8, stronger than expectations of -18.0.

The U.S. Apr NAHB housing market index rose +1 to a 7-month high of 45, right on expectations.

Hawkish comments Monday from Richmond Fed President Barkin were negative for stocks when he said, "I want to see more evidence that inflation is settling back to our 2% target."  He also said interest rates at their current level were not unusual in a historical sense and that "our economy works just fine with rates at this level."

Global bond yields on Monday moved higher.  The 10-year T-note yield rose to a 2-1/2 week high of 3.600% and finished up +7.6 bp at 3.589%.  The 10-year German bund yield rose to a 1-month high of 2.496% and finished up +3.4 bp at 2.473%, and the 10-year UK gilt yield rose to a 5-week high of 3.706% and finished up +2.4 bp at 3.691%.

Overseas stock markets Monday settled mixed.  The Euro Stoxx 50 closed down -0.53%.  China’s Shanghai Composite closed up +1.42%, and Japan’s Nikkei Stock Index closed up +0.07%. 

Today’s stock movers…

Prometheus Biosciences (RXDX) closed up more than +69% after Merck struck a deal to acquire the company for around $10.8 billion. 

M&T Bank (MTB) closed up more than +7% to lead gainers in the S&P 500 after reporting Q1 net interest income of $1.82 billion, above the consensus of $1.78 billion.

Digital Realty Trust (DLR) closed up more than +7% after Bank of America said “news of an equity raise could prove to be a clearing event” for the company’s shares. 

Charles Schwab (SCHW) closed up more than +3% after reporting Q1 net interest revenue of $2.77 billion, better than the consensus of $2.74 billion.   

HP Inc (HPQ) closed up more than +3% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $35.

Dexcom (DXCM) closed up more than +2% after Raymond James upgraded the stock to a strong buy from outperform with a price target of $138. 

Airline stocks rose after BloombergNEF reported that passenger flight schedules for April 18-24 imply global jet fuel demand will grow by +1.1% w/w to 6.1 million bpd, a sign of stronger air travel demand. As a result, American Airlines Group (AAL) and Delta Air Lines (DAL) closed up more than +2%. Also, Southwest Airlines (LUV) and Alaska Air Group (ALK) closed up more than +1%.

BlackRock (BLK) closed up nearly +1% after Morgan Stanley raised its price target on the stock to $861 from $829. 

State Street (STT) closed down more than -9% to lead losers in the S&P 500 after reporting Q1 net flows unexpectedly fell -$26 billion versus the consensus of an +$8.44 billion increase. Other trust bank stocks fell on the news, with Bank of New York Mellon (BK) closing down more than -4% and Northern Trust (NTRS) closing down more than -2%. 

Moderna (MRNA) closed down more than -8% to lead losers in the Nasdaq 100 after Bloomberg Intelligence said data presented by the company showing the benefits of its cancer vaccine doesn’t ensure an accelerated approval by the FDA as the length of the Phase II trial and an evolving landscape means consensus may be too optimistic about a 2025 launch.

Chip stocks moved lower Monday after Taiwan’s Economic Daily reported that Taiwan Semiconductor Manufacturing would cut its capex target to a range of $28 billion-$32 billion.  As a result, ASML Holding NV closed down more than -4%.  Also, Advanced Micro Devices (AMD) closed down more than -2%. In addition, Lam Research (LRCX) and Applied Materials (AMAT) closed down more than -1%. Finally, Global Foundries (GFS) closed down -0.91%, KLA Corp (KLAC) closed down -0.78% and Qualcomm (QCOM) closed down -0.65%.

Energy stocks retreated Monday after WTI crude oil prices fell more than -2%.  Marathon Oil (MRO) and APA Corp (APA) closed down more than-3%. Also, ConocoPhillips (COP), Occidental Petroleum (OXY), Phillips 66 (PSX), and Valero Energy (VLO) closed down more than -2%. In addition, Diamondback Energy (FANG), Exxon Mobil (XOM), and Marathon Petroleum (MPC) closed down more than -1%. 

Alphabet (GOOGL) closed down more than -3% after the New York Times reported that Microsoft’s Bing might replace Alphabet’s Google as the default search service on Samsung electronic devices.

Zoom Video Communications (ZM) closed down more than -2% after Citigroup said, “We see negative data points piling up, which could further pressure growth rates.”

Across the markets…

June 10-year T-notes (ZNM23) on Monday closed down -16 ticks, and the 10-year T-note yield rose by +7.6 bp to 3.589%.  June T-notes Monday fell to a 2-week low, and the 10-year T-note yield rose to a 2-1/2 week high of 3.600%.  Higher European government bond yields weighed on T-note prices after the 10-year UK gilt yield rose to a 5-week high of 3.700%, and the 10-year German bund yields rose to a 1-month high of 2.496%.  Also, an increase in inflation expectations undercut T-note prices after the 10-year breakeven inflation expectations rate Monday rose to a 2-week high of 2.337%. 

Signs of strength in the U.S. economy also knocked T-note prices lower after Monday’s news showed the U.S. Apr Empire manufacturing survey general business conditions index rose to a 9-month high, and the Apr NAHB housing market index rose to a 7-month high.  In addition, hawkish comments from Richmond Fed President Barkin undercut T-note prices when he said, "Our economy works just fine with rates at this level."

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