Stocks Close Higher as the Outlook Improves for Fed Rate Cuts

The S&P 500 Index ($SPX) (SPY) Friday closed up +1.26%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.18%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.99%. 

US stock indexes Friday settled moderately higher, with the S&P 500 and Nasdaq 100 posting 2-1/2 week highs and the Dow Jones Industrials posting a 3-1/2 week high.  Stocks opened higher Friday as solid earnings from Apple pushed it up more than +6% and fueled optimism about the earnings power of big technology companies. Stocks added to their gains as bond yields fell after Friday’s weaker-than-expected US reports on Apr nonfarm payrolls and the Apr ISM services index bolstered confidence that the Fed will be able to start cutting interest rates this year.

Stock indexes fell back from their best levels Friday based on hawkish comments from Fed Governor Bowman, who said inflation will likely remain elevated for "some time" and that she is "willing to hike" interest rates if inflation stalls or reverses.  Also, stagflation concerns are bearish for stocks after the Apr ISM services index unexpectedly contracted by the most in 16 months, and the Apr ISM services prices paid sub-index rose more than expected.

Corporate earnings results Friday were mixed.  On the positive side, Apple rose more than +6% after reporting better-than-expected Q2 revenue and announcing plans to buy back a record $110 billion stock.  Also, Amgen closed up more than +11% after reporting stronger-than-expected Q1 adjusted EPS and saying it was “very encouraged” by early results from a study of the experimental MariTide obesity drug.

On the negative side, Expedia Group closed down more than -15% after reporting Q1 gross bookings below consensus.  Also, Fortinet fell more than -9% after reporting Q1 billings below 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. 

US Apr nonfarm payrolls rose +175,000, below expectations of +240,000 and the smallest increase in 6 months. The Apr unemployment rate unexpectedly rose +0.1 to 3.9%, showing a weaker labor market than expectations of no change at 3.8%.

US Apr average hourly earnings rose +0.2% m/m and +3.9% y/y, weaker than expectations of +0.3% m/m and +4.0% y/y with the +3.9% y/y gain the smallest annual increase in 2-3/4 years.

The US Apr ISM services index unexpectedly fell -2.0 to 49.4, weaker than expectations of an increase to 52.0 and the steepest pace of contraction in 16 months.  The Apr ISM services prices paid sub-index rose +5.8 to 59.2, stronger than expectations of 55.0.

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 40% for the following meeting on July 30-31.

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.63%.  China's Shanghai Composite was closed for the Labor Day holiday.  Japan's Nikkei Stock Index was closed for the Constitution Memorial Day holiday. 

Interest Rates

June 10-year T-notes (ZNM24) on Friday closed up +16 ticks.  The 10-year T-note yield fell -7.9 bp to 4.502%.  Jun T-notes Friday jumped to a 3-week high, and the 10-year T-note yield tumbled to a 3-week low of 4.447%.  T-notes rallied Friday on weaker-than-expected US economic reports that bolstered the outlook for the Fed to begin cutting interest rates. Apr nonfarm payrolls and the Apr ISM services index were weaker than expected, while Apr average hourly earnings rose less than expected, all dovish factors for Fed policy.  Also, a decline in inflation expectations supported T-notes after the 10-year breakeven inflation rate fell to a 2-week low Friday of 2.312%.

T-notes fell back from their best levels on hawkish comments from Fed Governor Bowman, who said she's "willing to hike" interest rates if inflation stalls or reverses.  Also, rising price pressures in the service sector are hawkish for Fed policy and bearish for T-notes after the Apr ISM services prices paid sub-index rose more than expected.

European government bond yields Friday moved lower.  The 10-year German bund yield fell to a 2-week low of 2.452% and finished down -4.6 bp at 2.495%.  The 10-year UK gilt yield fell to a 2-1/2 week low of 4.189% and finished down -6.5 bp at 4.222%.

The Eurozone Mar unemployment rate was unchanged at 6.5%, right on expectations.

US Stock Movers

Apple (AAPL) closed up more than +6% after reporting Q2 revenue of $90.75 billion, better than the consensus of $90.33 billion, and announcing plans to buy back a record $110 billion of stock, above the consensus of $90 billion. 

Amgen (AMGN) closed up more than +11% to lead gainers in the S&P 500, Dow Jones Industrials, and the Nasdaq 100 after reporting Q1 adjusted EPS of $3.96, better than the consensus of $3.94, and it said it was “very encouraged” by early results from a study of the experimental MariTide obesity drug. 

Live Nation Entertainment (LYV) closed up more than +7% after reporting Q1 revenue of $3.80 billion, above the consensus of $3.26 billion. 

Arista Networks (ANET) closed up more than +5% after Jeffries upgraded the stock to buy from hold with a price target of $320. 

Motorola Solutions (MSI) closed up more than +4% after reporting Q1 net sales of $2.39 billion, better than the consensus of $2.35 billion, and raised guidance on its full-year revenue to up about +7% from a prior view of up about +6%. 

Digital Realty Trust (DLR) closed up more than +4% after reporting Q1 core FFO/share of $1.67, stronger than the consensus of $1.63, and forecasting full-year core FFO/share of $6.60-$6.75, the midpoint above the consensus of $6.64. 

Booking Holdings (BKNG) closed up more than +3% after reporting Q1 revenue of $4.42 billion, stronger than the consensus of $4.25 billion.

Homebuilders rallied Friday after the 10-year T-note yield fell to a 3-week low, a positive factor for housing demand.  Builders FirstSource (BLDR) closed up more than +3%.  Also, PulteGroup (PHM), DR Horton (DHI), Toll Brothers (TOL), and Lennar (LEN) closed up more than +2%.

Expedia Group (EXPE) closed down more than -15% to lead losers in the S&P 500 after reporting Q1 gross bookings of $30.16 billion, below the consensus of $30.50 billion.

Fortinet (FTNT) closed down more than -9% to lead losers in the Nasdaq 100 after reporting Q1 billings of $1.41 billion, weaker than the consensus of $1.43 billion. 

Ingersoll Rand (IR) closed down more than -6% after reporting Q1 revenue of $1.67 billion, weaker than the consensus of $1.70 billion. 

Trimble (TRMB) closed down more than -6% after forecasting Q2 revenue of $845 million-$875 million, weaker than the consensus of $879.3 million.

DaVita (DVA) closed down more than -5% despite reporting better-than-expected Q1 EPS after forecasting full-year free cash flow (FCF) of $900 million-$1.15 billion, the midpoint below the consensus of $1.13 billion. 

Cloudflare (NET) closed down more than -16% after forecasting Q2 revenue of $393.5 million-$394.5 million, below the consensus of $394.5 million. 

Fluor (FLR) closed down more than -5% after reporting Q1 adjusted EPS of 47 cents, weaker than the consensus of 57 cents.

Starbucks (SBUX) closed down more than -2% after DZ Bank AG downgraded the stock to hold from buy.

Earnings Reports (5/6/2024)

Axon Enterprise Inc (AXON), Fidelity National Information (FIS), FMC Corp (FMC), International Flavors & Fragrances (IFF), Loews Corp (L), Microchip Technology Inc (MCHP), Realty Income Corp (O), Simon Property Group Inc (SPG), Tyson Foods Inc (TSN), Vertex Pharmaceuticals Inc (VRTX), Williams Cos Inc/The (WMB).

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