Stocks Finish Higher on Chip Stock Strength and Dovish Powell

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +1.58%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.24%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +3.01%.

US stocks rallied Wednesday, with the S&P 500 and Nasdaq 100 posting 1-week highs and the Dow Jones Industrials posting a 1-1/2 week high.  A flurry of bullish news Wednesday fueled a sharp rebound in chip stocks.  Nvidia surged more than +12% after Morgan Stanley named the stock a top US chip stock pick and said the recent selloff in the stock has opened up a good entry point. Also, ASML Holding NV rose more than +8% after Reuters reported the Biden administration planned to exempt chip equipment makers in Japan, the Netherlands, and South Korea from upcoming export restrictions.  In addition, Advanced Micro Devices rose more than +7% after an upbeat revenue forecast.

Stock indexes also found support Wednesday after the 10-year T-note yield fell to a 4-1/2 month low when the US Jul ADP employment change and the Q2 employment cost index rose less than expected, dovish factors for Fed policy.  Stocks raced to their highs Wednesday afternoon when Fed Chair Powell said upside risks to inflation have come down as the labor market has cooled and a Fed rate cut "could be" on the table at the September FOMC meeting.

The FOMC, as expected, kept the fed funds target rate unchanged at 5.25%-5.50% and said it doesn't expect to cut interest rates "until it has gained greater confidence that inflation is moving sustainably toward 2%." However, the FOMC tweaked its post-meeting statement to say it is "attentive to the risks to both sides of its dual mandate," rather than prior wording focused just on inflation risks.

The US Jul ADP employment change rose +122,000, weaker than expectations of +150,000 and the smallest increase in 6 months.

The US Q2 employment cost index rose +0.9% q/q, weaker than expectations of +1.0% q/q.

The US Jul MNI Chicago PMI fell -2.1 to 45.3, a smaller decline than expectations of 45.0.

US Jun pending home sales rose +4.8% m/m, stronger than expectations of +1.5% m/m and the biggest increase in 6 months.

On Wednesday, the BOJ unexpectedly voted 7-2 to raise its benchmark interest rate to 0.25% from 0% to 0.1%.  The BOJ also said it would reduce its monthly pace of bond purchases to around 3 trillion yen ($19.9 billion) by the first quarter of 2026 from 5.7 trillion yen in July. 

Stock investors will continue to focus on tech stocks, with key earnings reports on tap for this week.  Magnificent 7 companies reporting this week include Meta (META) after Wednesday’s close and Apple (AAPL) and Amazon (AMZN) on Thursday.  Nvidia (NVDA) is expected to report earnings on August 28.  

The market consensus is that Q2 earnings for the S&P 500 companies will rise +9% y/y.  About one-third of the companies in the S&P 500 have reported thus far.  According to Bloomberg, most reporting companies have beaten their earnings consensus, but only 43% have beaten revenue expectations, the lowest percentage in five years.

The markets are discounting the chances for a -25 bp rate cut at 100% for the September 17-18 FOMC meeting.

Overseas stock markets Wednesday settled higher.  The Euro Stoxx 50 rose to a 1-week high and closed up +0.66%.  China's Shanghai Composite rose to a 1-week high and closed up +2.06%.  Japan's Nikkei Stock 225 Index rose to a 1-week high and closed up by +1.49%.

Interest Rates

September 10-year T-notes (ZNU24) Wednesday closed up +8 ticks.  The 10-year T-note yield fell -4.0 bp to 4.099%.  Sep T-notes Wednesday rallied to a 6-month nearest-futures high, and the 10-year T-note yield fell to a 4-1/2 month low of 4.070%.  T-note prices are underpinned by an increase in safe-haven demand due to rising geopolitical tensions in the Middle East after Israel said it assassinated top leaders of Hezbollah in Beirut and Hamas in Tehran.  T-notes also found support from Wednesday’s US economic news that showed the US Jul ADP employment change and the Q2 employment cost index rose less than expected, dovish factors for Fed policy.  T-notes raced to their highs Wednesday afternoon when Fed Chair Powell said a Fed rate cut "could be" on the table at the September FOMC meeting. 

T-notes also found support Wednesday as supply concerns eased after the Treasury left its quarterly issuance of longer-term debt unchanged for a second quarter at $125 billion and maintained its guidance that it doesn’t expect to need increasing issuance of notes and bonds for “several quarters.”

European government bond yields Wednesday moved lower.  The 10-year German bund yield fell to a 4-month low of 2.300% and finished down -3.6 bp at 2.304%.  The 10-year UK gilt yield fell to a 4-month low of 3.967% and finished down -7.3 bp at 3.970%.

Eurozone Jul CPI rose +2.6% y/y, stronger than expectations of +2.5% y/y.  The Jul core CPI rose +2.9% y/y, stronger than expectations of +2.8% y/y.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 95% for the September 12 meeting.

US Stock Movers

Nvidia (NVDA) closed up more than +12% to lead gainers in the Nasdaq 100 after Morgan Stanley named the stock a top US chip stock pick and said recent weakness in the stock provides a “good entry point.”

Vistra Corp (VST) closed up more than +14% to lead gainers in the S&P 500 after results of an auction by grid operator PJM Interconnection LLC said power generators that provide electricity to the 13-state grid that stretches from New Jersey to Illinois will get a record $269.92 per megawatt-day from utilities to provide capacity over a 12-month period starting in June, a more than ninefold increase from $28.92 in last year’s auction. 

Match Group (MTCH) closed up more than +13% after reporting Q2 revenue of $864.1 million, above the consensus of $856.6 million, and it said it plans to cut about 6% of its global staff. 

ASML Holding NV (ASML) closed up more than +8% after Reuters reported the company will be exempt from new US chip export restrictions. 

Advanced Micro Devices (AMD) closed up more than +4% after reporting Q2 revenue of $5.80 billion, above the consensus of $5.73 billion, and said it will commit to annual introductions of new AI processors. 

Chip stocks rebounded Wednesday and recovered from Tuesday’s selloff, which gave a boost to the overall market.  Broadcom (AVGO) closed up more than +11%,  Also, ARM Holdings Plc (ARM), KLA Corp (KLAC), and Qualcomm (QCOM) closed up more than +8%, while Applied Materials (AMAT), Micron Technology (MU), and Lam Research (LRCX) closed up more than +7%.   In addition, Marvell Technology (MRVL) closed up more than +6%, and ON Semiconductor Corp (ON) and Western Digital (WDC) closed up more than +5%. 

BorgWarner (BWA) closed up more than +8% after reporting Q2 adjusted EPS of $1.19, stronger than the consensus of $1.00. 

Dupont de Nemours (DD) closed up more than +4% after reporting Q2 net sales of $3.20 billion, better than the consensus of $3.05 billion, and raised its full-year net sales forecast to $12.40 billion-$12.50 billion from a previous estimate of $12.10 billion-$12.40 billion. 

Starbucks (SBUX) closed up more than +2% after reporting Q3 adjusted EPS of 93 cents, better than the consensus of 92 cents. 

Humana (HUM) closed down more than -10% to lead losers in the S&P 500 after cutting its full-year EPS estimate to $12.81 from a prior view of $13.93 and warned of higher-than-expected inpatient hospital admissions that point toward elevated costs for the company. 

Verisk Analytics (VRSK) closed down more than -8% to lead losers in the Nasdaq 100 after forecasting full-year adjusted EPS of $6.30-$6.60, the midpoint below the consensus of $6.57.

Bunge Global (BG) closed down more than -8% after reporting Q2 net sales of $13.24 billion, well below the consensus of $14.19 billion.

Groupon (GRPN) closed down more than -15% after cutting its full-year adjusted Ebitda estimate to $65 million-$80 million from a previous forecast of $80 million-$100 million, well below the consensus of $98.7 million. 

Pinterest (PINS) closed down more than -14% after forecasting Q3 revenue of $885 million-$900 million, weaker than the consensus of $907.7 million.

Marriott International (MAR) closed down more than -5% after cutting its full-year adjusted EPS forecast to $9.23-$9.40 from a previous estimate of $9.31-$9.65, weaker than the consensus of $9.50. 

Skyworks Solutions (SWKS) closed down more than -3% after reporting Q3 adjusted EPS of $1.21, below the consensus of $1.22.  forecast to $11.55-$11.65 from a previous estimate of $11.75-$12.05, below the consensus of $11.80.

Microsoft (MSFT) closed down more than -1% after reporting Q4 cloud revenue of $36.80 billion, weaker than the consensus of $36.84 billion. 

Earnings Reports (8/1/2024)

AES Corp/The (AES), Air Products and Chemicals Inc (APD), Alliant Energy Corp (LNT), Amazon.com Inc (AMZN), Ameren Corp (AEE), AMETEK Inc (AME), Apple Inc (AAPL), Aptiv PLC (APTV), Ball Corp (BALL), Becton Dickinson & Co (BDX), Biogen Inc (BIIB), Bio-Rad Laboratories Inc (BIO), Booking Holdings Inc (BKNG), Camden Property Trust (CPT), Celanese Corp (CE), Cigna Group/The (CI), Clorox Co/The (CLX), ConocoPhillips (COP), Consolidated Edison Inc (ED), Coterra Energy Inc (CTRA), Cummins Inc (CMI), Dominion Energy Inc (D), Eaton Corp PLC (ETN), Entergy Corp (ETR), EOG Resources Inc (EOG), Exelon Corp (EXC), Federal Realty Investment Trust (FRT), Gen Digital Inc (GEN), GoDaddy Inc (GDDY), Hershey Co/The (HSY), Huntington Ingalls Industries (HII), Intel Corp (INTC), Intercontinental Exchange Inc (ICE), Iron Mountain Inc (IRM), Kellanova (K), Kimco Realty Corp (KIM), Labcorp Holdings Inc (LH), Mettler-Toledo International Inc (MTD), Microchip Technology Inc (MCHP), Moderna Inc (MRNA), Monolithic Power Systems Inc (MPWR), Motorola Solutions Inc (MSI), Pinnacle West Capital Corp (PNW), Prudential Financial Inc (PRU), Quanta Services Inc (PWR), Regency Centers Corp (REG), Regeneron Pharmaceuticals Inc (REGN), ResMed Inc (RMD), Southern Co/The (SO), Targa Resources Corp (TRGP), Teleflex Inc (TFX), 

Ventas Inc (VTR), Vertex Pharmaceuticals Inc (VRTX), WW Grainger Inc (GWW), Xcel Energy Inc (XEL).

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