Stocks Settle Higher on Solid Earnings and Fed Rate Cut Optimism

The S&P 500 Index ($SPX) (SPY) Monday closed up +1.03%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.46%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.13%. 

US stock indexes on Monday settled moderately higher, with the S&P 500 and Nasdaq 100 posting 3-week highs and the Dow Jones Industrials posting a 3-1/2 week high.  Stocks had carryover support from last Friday’s Fed-friendly US payroll report that bolstered expectations for the Fed to cut interest rates this year.  Also, the strength of chip makers and AI hardware stocks on Monday boosted the overall market. 

Q1 earnings results have been mostly better than expected, a supportive factor for stocks.  Q1 earnings are now expected to climb +6.5% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

On Monday, M&A activity was bullish for stocks after the Financial Times reported that Global Infrastructure Partners and CPP Investments are nearing a deal to buy Allete Inc. for about $5 billion or $67 per share in cash.  Also, EQT Corp agreed to acquire Perficient for about $3 billion or $76 per share in cash.  In addition, Sony Group Corp and Apollo Global Management made a $26 billion nonbinding offer to buy Paramount Global. 

Fed comments Monday were on the hawkish side and negative for stocks.  New York Fed President Williams said the Fed will eventually cut interest rates, but policymakers need to see more evidence things are "moving in the direction we want to see on inflation."  Also, Richmond Fed President Barkin said the strength of the US labor market offers the Fed time to gain confidence that inflation is moving sustainably lower before lowering borrowing costs.  He added that he is more worried about the risk that inflation runs too high for too long than about the economy unduly weakening.

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 34% for the following meeting on July 30-31.

Overseas stock markets on Monday settled higher.  The Euro Stoxx 50 closed up +0.72%.  China's Shanghai Composite climbed to a 7-3/4 month high and closed up +1.16%.  Japan's Nikkei Stock Index was closed for the Children’s Day holiday. 

Interest Rates

June 10-year T-notes (ZNM24) on Monday closed up +1 tick.  The 10-year T-note yield fell -1.9 bp at 4.489%.  T-notes had carryover support from last Friday’s weaker-than-expected April payroll and April ISM services reports, which bolstered the outlook for the Fed to begin cutting interest rates.  Also, a rally in 10-year German bunds Monday to a 2-week high provided carryover support to T-notes. 

Supply pressures limited gains in T-notes as the Treasury auctions $125 billion of T-notes and T-bonds this week for the quarterly May refunding.  Also, hawkish comments from New York Fed President Williams and Richmond Fed President Barkin were negative for T-notes when they said they needed to gain confidence that inflation was moving lower before cutting interest rates. 

German government bond yields Monday moved lower.  The 10-year German bund yield fell to a 2-week low of 2.439% and finished down -2.6 bp at 2.468%.  10-year UK gilts did not trade on Monday, with markets in the UK closed for the May Day holiday.

ECB Chief Economist Lane said recent Eurozone data have made him more certain that inflation is returning to the ECB's 2% goal, raising the likelihood of a first interest rate cut in June.

ECB Governing Council member Simkus said he expects the ECB to cut interest rates three times this year, starting with a planned move in June.

The Eurozone May Sentix investor confidence index rose +2.3 to a 2-1/4 year high of -3.6, stronger than expectations of -5.0. 

Eurozone Mar PPI fell -7.8% y/y, weaker than expectations of -7.7% y/y.

The Eurozone Apr S&P composite PMI was revised upward by +0.3 to 51.7 from the previously reported 51.4, the fastest pace of expansion in 11 months.

US Stock Movers

The strength of chip makers and AI hardware stocks supported the overall market.  Super Micro Computer (SMCI) closed up more than +6% to lead gainers in the S&P 500.  Also,  Nvidia (NVDA), Advanced Micro Devices (AMD), and KLA Corp (KLAC) closed up more than +3%.  In addition, Broadcom (AVGO), Microchip Technology (MCHP), and Applied Materials (AMAT) closed up more than +2%. 

Micron Technology (MU) is up more than +4% to lead gainers in the Nasdaq 100 after Baird upgraded the stock to outperform from neutral with a price target of $150. 

Airline stocks rallied Monday on signs of strong summer travel demand. American Airlines Group (AAL) closed up more than +5%, and United Airlines Holdings (UAL) and Southwest Airlines (LUV) closed up more than +4%.  Also, Alaska Air Group (ALK) and Delta Air Lines (DAL) closed up more than +2%.   

Freshpet (FRPT) closed up more than +10% after reporting Q1 net sales of $223.8 million, above the consensus of $216.4 million. 

Perficient (PRFT) closed up more than +52% after EQT Corp agreed to acquire the company for about $3 billion or $76 per share in cash.

Paramount Global (PARA) closed up more than +2% after Sony Group Corp and Apollo Global Management made a $26 billion nonbinding offer to buy the company. 

Ingersoll Rand (IR) closed up more than +1% after Fitch Ratings upgraded the company’s long-term issuer default rating to BBB from BBB- and raised the outlook to positive from watch positive.

Tyson Foods (TSN) closed down more than -5% to lead losers in the S&P 500 after reporting Q2 sales of $13.07 billion, weaker than the consensus of $13.15 billion. 

Defensive drug makers and pharmaceutical stocks are under pressure today with a rally in the broader market. As a result, Amgen (AMGN) closed down more than -3% to lead losers in the Dow Jones Industrials and Nasdaq 100.  Also, Moderna (MRNA) is down more than -2%.  In addition, AbbVie (ABBV) and Baxter International (BAX) closed down -1%. 

Fastenal (FAST) is down more than -2% after Bloomberg Intelligence said the company’s Q2 earnings estimates may be under pressure after Fastenal reported its daily sales growth in April fell to 0.7%, the slowest pace in 3 years. 

Monster Beverage (MNST) closed down more than -1% as analysts cut their price targets on the stock by an average of -2% since the company reported earnings results last Thursday.

Meritage Homes (MTH) closed down more than -1% after announcing it will offer $500 million of convertible senior notes due 2028. 

EyePoint Pharmaceuticals (EYPT) closed down more than -43% after reporting a mid-stage study of its investigative therapy for a diabetes complication that affects the eyes, which did not meet its main goal. 

Earnings Reports (5/7/2024)

Arista Networks Inc (ANET), Assurant Inc (AIZ), Bio-Rad Laboratories Inc (BIO), Builders FirstSource Inc (BLDR), Duke Energy Corp (DUK), Electronic Arts Inc (EA), Expeditors International of Washington (EXPD), Henry Schein Inc (HSIC), Jack Henry & Associates Inc (JKHY), Jacobs Solutions Inc (J), Kenvue Inc (KVUE), MarketAxess Holdings Inc (MKTX), Match Group Inc (MTCH), McKesson Corp (MCK), NRG Energy Inc (NRG), Occidental Petroleum Corp (OXY), Rockwell Automation Inc (ROK), Sempra (SRE), TransDigm Group Inc (TDG), Walt Disney Co/The (DIS), Waters Corp (WAT), Wynn Resorts Ltd (WYNN).

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