Broader Equity Market Falls as Mega-Cap Tech Stocks Slump

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.88%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.08%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -2.24%.

Stock indexes Thursday settled mixed, with the Dow Jones Industrials climbing to a 7-week high and the Nasdaq 100 falling to a 1-week low.  Thursday's rotation out of mega-cap technology stocks knocked the S&P 500 from a new record high and weighed on the broader market.  Also, airline stocks were under pressure Thursday after Delta Air Lines forecast Q3 adjusted EPS below consensus.  In addition, Tesla tumbled more than -8% to weigh on technology stocks after it postponed its planned robotaxi unveiling to October.

Stocks found early support on Thursday’s Fed-friendly US June CPI report that knocked bond yields lower and reinforced speculation the Fed will be able to cut interest rates this year. However, gains in stocks were limited after US weekly initial unemployment claims fell to a 6-week low, a sign of strength in the labor market that is hawkish for Fed policy.

The US June CPI eased to +3.0% y/y from +3.3% y/y in May, better than expectations of +3.1% y/y.  The June CPI ex-food and energy eased to a 3-year low of +3.3% y/y from +3.4% y/y in May, better than expectations of no change at +3.4% y/y.

US weekly initial unemployment claims fell -17,000 to a 6-week low of 222,000, showing a stronger labor market than expectations of 235,000.  Weekly continuing claims unexpectedly fell -4,000 to 1,852 million, showing a stronger labor market than expectations of an increase to 1.860 million.

Fed comments Thursday were mixed for stocks.  On the dovish side, San Francisco Fed President Daly said, "With the information we have received to date, which include data on employment, inflation, GDP growth and the outlook for the economy, I see it as likely that some policy adjustment will be warranted."  Conversely, St. Louis Fed President Musalem said Thursday's June CPI report was "encouraging," but he "will be looking for more evidence that inflation can be expected to converge to 2% going forward."

The markets are looking ahead to the Q2 earnings season that begins Friday, as some of the biggest US banks, including JPMorgan Chase, Citigroup, and Wells Fargo, will report quarterly results.  

The markets are discounting the chances for a -25 bp rate cut at 9% for the next FOMC meeting on July 30-31 and 91% for the following meeting on September 17-18.

Overseas stock markets Thursday settled higher.  The Euro Stoxx 50 closed up +0.35%.  China's Shanghai Composite closed up +1.06%.  Japan's Nikkei Stock 225 Index climbed to a new all-time high and closed up +0.94%.

Interest Rates

September 10-year T-notes (ZNU24) Thursday closed up +21 ticks.  The 10-year T-note yield fell -8.9 bp to 4.195%.  Sep T-notes Thursday rallied to a 4-month high, and the 10-year T-note yield fell to a 4-month low of 4.166%.  T-notes rallied Thursday after today’s weaker-than-expected US CPI report bolstered expectations for the Fed to cut interest rates this year.  Also, a decline in inflation expectations supported T-notes after the 10-year breakeven inflation rate fell to a 2-week low of 2.237%.

On the bearish side for T-notes, weekly US jobless claims fell to a 6-week low, a hawkish factor for Fed policy.  Also, weak demand for the Treasury’s $22 billion auction of reopened 30-year T-bonds weighed on T-note prices as the auction had a bid-to-cover ratio of 2.30, well below the 10-auction average of 2.40. 

European government bond yields Thursday moved lower.  The 10-year German bund yield fell to a 1-1/2 week low of 2.462% and finished down -7.0 bp at 2.463%.  The 10-year UK gilt yield fell to a 2-week low of 4.072% and finished down -5.2 bp at 4.074%. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 80% for the September 12 meeting.

US Stock Movers

Tesla (TSLA) closed down more than -8% to lead losers in the S&P 500 and Nasdaq 100 after it said it plans to postpone the unveiling of its robotaxi to October from the expected August 8 date. 

Mega-cap tech stocks sold off Thursday to weigh on the overall market.  Meta Platforms (META) closed down more than -4%, and Netflix (NFLX) closed down more than -3%.  Also, Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), and Microsoft (MSFT) closed down more than -2%.

Chip stocks retreated Thursday to weigh on technology stocks and the broader market.  Nvidia (NVDA), Lam Research (LRCX), and Applied Materials (AMAT) closed down more than -5%.  Also, Micron Technology (MU), KLA Corp (KLAC), Microchip Technology (MCHP), and Qualcomm (QCOM) closed down more than -4%.  In addition, Intel (INTC) closed down more than -3% to lead losers in the Dow Jones Industrials.  Finally, ON Semiconductor (ON), Marvell Technology (MRVL), and GlobalFoundries (GFS) closed down more than -3%.

Airline stocks were under pressure Thursday after Delta Air Lines forecast Q3 adjusted EPS of $1.70-$2.00, below the consensus of $2.04. As a result, Delta Air Lines (DAL), American Airlines Group (AAL), and United Airlines Holdings (UAL) closed down more than -3%.  Also, Southwest Airlines (LUV) closed down more than -2%. 

Conagra Brands (CAG) closed down more than -1% after reporting Q4 net sales of $2.91 billion, below the consensus of $2.93 billion. 

Citigroup (C) closed down more than 1% after US bank regulators fined it $136 million over data quality management and risk control issues.

Homebuilding and supply stocks rallied Thursday after the 10-year T-note yield fell to a 4-month low, a supportive factor for housing demand. Builders FirstSource (BLDR), DR Horton (DHI), and Toll Brothers (TOL) closed up more than +7%.  Also, PulteGroup (PHM) and Lennar (LEN) closed up more than +6%.  In addition, Home Depot (HD) closed up more than +2% to lead gainers in the Dow Jones Industrials.

Real estate investment trusts moved higher Thursday with the drop in the 10-year T-note yield to a 4-month low.  As a result, Alexandria Real Estate Equities (ARE) closed up more than +6%, and VICI Properties (VICI) closed up more than +5%.  Also, Realty Income (O), Healthpeak Properties (DOC), Federal Realty Investment Trust (FRT), and Kimco Realty (KIM) closed up more than +2%.  In addition, Digital Realty Trust (DLR) closed up more than +1%.

Atlassian (TEAM) closed up more than +1% after Capital One Securities upgraded the stock to overweight from equal weight with a price target of $211. 

Alcoa (AA) closed up +2% after announcing Q2 preliminary sales of $2.85 billion-$2.93 billion, above the consensus of $2.80 billion.

WD-40 (WDFC) closed up more than +4% after reporting Q3 EPS of $1.46, stronger than the consensus of $1.39. 

Earnings Reports (7/12/2024)

Bank of New York Mellon Corp/T (BK), Citigroup Inc (C), Fastenal Co (FAST), JPMorgan Chase & Co (JPM), Wells Fargo & Co (WFC).

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