Broader Market Settles Mixed on Strength in Tech Stocks and Weakness in Energy Stocks

The S&P 500 Index ($SPX) (SPY) Monday closed up +0.11%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.30%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.35%.

Stocks on Monday settled mixed.  Strength in technology stocks boosted the broader market, with Nvidia closing up more than +4% to lead chip stocks higher after it announced a new generation of AI chips for 2025 and a next-generation platform in development called Rubin for 2026 at a Computex conference in Taiwan.  Also, a decline in bond yields Monday was bullish for stocks after the 10-year T-note yield fell to a 2-week low.

Gains in the overall market were limited as economic concerns weighed on stocks after US manufacturing activity unexpectedly weakened last month.  Also, energy stocks were under pressure after WTI crude prices fell more than -3% to a 3-month low. 

The US May ISM manufacturing index unexpectedly fell -0.5 to 48.7, weaker than expectations of an increase to 49.5.  The May ISM price paid sub-index fell -3.9 to 57.0, weaker than expectations of 59.0.

US Apr construction spending unexpectedly fell -0.1% m/m, weaker than expectations of +0.2% m/m.

M&A activity supports stocks after Waste Management agreed to buy Stericycle for about $5.8 billion, or $62 per share in cash.  Also, Becton Dickinson decided to buy the critical care unit of Edwards Lifesciences for $4.2 billion.

Some positive Chinese manufacturing news bolstered global economic prospects and supported stocks after the China May Caixin manufacturing PMI rose +0.3 to 51.7, stronger than expectations of 51.6 and the highest level in 23 months.

The markets are looking ahead to Thursday’s ECB meeting, with the ECB expected to cut its main refinancing rate by 25 bp to 4.25%.  In addition, Friday’s monthly US payroll report for May will be scoured for clues to the labor market's strength that could decide when the Fed can begin cutting interest rates.  The consensus is for May nonfarm payrolls to increase by +190,000 and for the May unemployment rate to remain unchanged at 3.9%.

Minneapolis Fed President Kashkari told the Financial Times that the Federal Reserve will likely keep interest rates on hold for an "extended period of time" until new economic data convinces policymakers that inflation is on the way down.

The markets are discounting the chances for a -25 bp rate cut at 1% for the June 11-12 FOMC meeting and 15% for the following meeting on July 30-31.

Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +7.1% 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. 

Overseas stock markets Monday settled mixed.  The Euro Stoxx 50 closed up +0.40%.  China's Shanghai Composite closed down -0.27%.  Japan's Nikkei Stock 225 Index closed up +1.13%.

Interest Rates

September 10-year T-notes (ZNU24) Monday closed up +24.5 ticks.  The 10-year T-note yield fell -9.5 bp to 4.404%.  Sep T-notes Monday rallied to a 2-week high, and the 10-year T-note yield dropped to a 2-week low of 4.390%.  T-notes moved higher early Monday on carryover support from gains in European government bonds.  Gains in T-notes accelerated Monday after the May ISM manufacturing index and May ISM price paid sub-index declined more than expected, dovish factors for Fed policy.  In addition, T-notes gained after crude prices fell more than -3% to a 3-month low, which knocked inflation expectations lower and is bullish for T-notes. 

Eurozone government bond yields Monday moved lower.  The 10-year German bund yield fell -8.4 bp to 2.580%.  The 10-year UK gilt yield fell -9.8 bp to 4.221%.

The Eurozone May S&P manufacturing PMI was revised downward by -0.1 to 47.3 from the previously reported 47.4.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for Thursday’s meeting.  If the ECB cuts rates by -25 bp on Thursday as expected, then the markets are expecting a 0% chance of another rate cut at the following meeting on July 18 and a 61% chance of a -25 bp rate cut at the September 12 meeting.

US Stock Movers

Nvidia (NVDA) closed up more than +4% to lead gainers in the Nasdaq 100 after CEO Huang announced a Blackwell Ultra AI chip for 2025 and a next-generation platform in development called Rubin for 2026 at a Computex conference in Taiwan.

Energy stocks and energy service providers retreated Monday, with the price of WTI crude falling more than -3% to a 3-month low.  As a result, Haliburton (HAL) closed down more than -5%.  Also, Diamondback Energy (FANG), Schlumberger (SLB), Devon Energy (DVN), and Baker Hughes (BKR) closed down more than -4%.  In addition, Occidental Petroleum (OXY), APA Corp (APA), and Hess Corp (HES) closed down more than -3%.  Finally, Chevron (CVX) closed down more than -3% to lead losers in the Dow Jones Industrials.

Machinery stocks were under pressure Monday after the May ISM manufacturing index fell more than expected.  As a result, Builders FirstSource (BLDR) closed down more than -5%, and United Rentals (URI) closed down more than -4%.  Also, Generac Holdings (GNRC), Ingersoll Rand (IR), and Parker-Hannifin (PH) closed down more than -3%.

Autodesk (ADSK) closed up more than +4% after it said no financial statements would be restated or adjusted following the results of an investigation by the board’s audit committee. 

Paramount Global (PARA) closed up more than +7% to lead gainers in the S&P 500 after Bloomberg reported that Sydance Media’s latest offer for the company includes an option for non-voting shareholders to cash out a portion of their stock for about $15 a share. 

Boeing (BA) closed up more than +3% to lead gainers in the Dow Jones Industrials after Shenzhen TV reported the company resumed deliveries of new aircraft to China.

Stericycle (SRCL) closed up more than +14% after Waste Management agreed to buy the company in a deal valued at about $5.8 billion.

Best Buy (BBY) closed up more than +2% after Citigroup double-upgraded the stock to buy from sell with a price target of $100. 

Science Applications International (SAIC) closed down more than -11% after reporting Q1 adjusted EPS of $1.92, below the consensus of $1.94. 

Tractor Supply (TSCO) closed down more than -6% to lead losers in the S&P 500 after Loop Capital said a widening price gap versus competitors and the stock’s lofty valuation raise concerns.

Waste Management (WM) closed down more than -4% after acquiring Stericycle for $5.8 billion, or $62 per share in cash.

Cava Group (CAVA) closed down more than -4% after JPMorgan Chase downgraded the stock to neutral from overweight.

Target (TGT) closed down more than -1% after BNP Paribas Exane initiated coverage on the stock with a recommendation of underperform and a price target of $116. 

Earnings Reports (6/4/2024)

Bath & Body Works Inc (BBWI), Core & Main Inc (CNM), Crowdstrike Holdings Inc (CRWD), Donaldson Co Inc (DCI), Ferguson PLC (FERG), Guidewire Software Inc (GWRE), Hewlett Packard Enterprise Co (HPE), PVH Corp (PVH).

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