Stocks Finish Higher on Signs of US Economic Resilience

The S&P 500 Index ($SPX) (SPY) Friday closed up +0.20%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.24%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.09%.

US stocks Friday recovered from early losses and posted modest gains, with the S&P 500 and Dow Jones Industrials climbing to 2-week highs and the Nasdaq 100 climbing to a 3-week high.  Short covering emerged in stocks Friday after the University of Michigan US Aug consumer sentiment index rose more than expected.

Stocks were also supported by lower T-note yields, which fell on the weaker-than-expected US housing starts report and dovish Fed comments. Chicago Fed President Goolsbee said the US labor market and some leading indicators on the economy are flashing warning signs, and there are concerns unemployment will continue to rise.  His comments suggest he will support a rate cut at the September 17-18 FOMC meeting.

Stocks on Friday initially posted moderate losses on weak US housing news after July housing starts and building permits fell more than expected to 4-year lows.  Also, negative corporate news undercut stocks, with Applied Materials closing down more than -2% to lead chip stock lower after a disappointing Q4 sales forecast.  Meanwhile, Amcor Plc closing down more than -3% after reporting weaker-than-expected Q4 net sales.

US July housing starts fell -6.8% m/m to a 4-year low of 1.238 million, weaker than expectations of 1.333 million.  July building permits, a proxy for future construction, fell -4.0% m/m to a 4-year low of 1.396 million, weaker than expectations of 1.425 million.

The University of Michigan’s Aug US consumer sentiment index rose +1.4 to 67.8, stronger than expectations of 66.9.

The University of Michigan US Aug 1-year inflation expectations indicator was unchanged from July at 2.9%, stronger than expectations of 2.8%.  Also, the Aug 5-10 year inflation expectations indicator was unchanged from July at 3.0%, stronger than expectations of 2.9%.

The market consensus is that Q2 earnings for the S&P 500 companies will rise +7.4% y/y.  More than 80% 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 at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 30% for a -50 bp rate cut at that meeting.

Overseas stock markets Friday settled higher.  The Euro Stoxx 50 rallied to a 2-week high and closed up +0.68%. China's Shanghai Composite closed up +0.07%.  Japan's Nikkei Stock 225 rose to a 2-week high and closed up sharply by +3.64%.

Interest Rates

September 10-year T-notes (ZNU24) Friday closed up +5 ticks.  The 10-year T-note yield fell -2.1 bp to 3.892%.  Sep T-notes Friday found support on dovish comments from Chicago Fed President Goolsbee, who said the US labor market and some leading indicators on the economy are flashing warning signs. T-notes also rose on Friday’s decline in US July housing starts and building permits to 4-year lows, dovish factors for Fed policy.

T-note prices fell back from their best levels Friday when the University of Michigan’s Aug US consumer sentiment index rose more than expected. Also, the University of Michigan’s US Aug inflation expectations indicator was unchanged from July, stronger than expectations of a slight decline.  In addition, strength in stocks Friday curbed safe-haven demand for T-notes.

European government bond yields on Friday were mixed.  The 10-year German bund yield fell -1.5 bp to 2.247%.  The 10-year UK gilt yield rose +0.3 bp to 3.926%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.

US Stock Movers

Applied Materials (AMAT) closed down -1.86% after forecasting Q4 net sales of $6.53 billion to $7.33 billion, which was in line with the market consensus but disappointed investors hoping for a bigger payoff from AI spending.  Other chip stocks weakened on the news, with Lam Research (LRCX), KLA Corp (KLAC), and ASML Holding NV (ASML) closing down more than -1%.  Also, Texas Instruments (TXN) closed down -0.69%, and Qualcomm (QCOM) closed down -0.67%.

Ulta Beauty (ULTA) closed up more than +3%, adding to Thursday’s +11% surge after Berkshire Hathaway disclosed it took a new stake in the company.

Align Technology (ALGN) closed up more than +2%, adding to Thursday’s +6% gain when Piper Sandler said volumes for the company’s dental medical devices have “outperformed by the widest margin we’ve seen in nearly three years.”

H&R Block (HRB) closed up more than +11% after reporting Q4 revenue of $1.06 billion, stronger than the consensus of $1.05 billion, and forecasting 2025 revenue of $3.69 billion-$3.75 billion, above the consensus of $3.67 billion.

Coherent (COHR) closed up more than +7% after reporting Q4 revenue of $1.31 billion, better than the consensus of $1.27 billion, and forecasting Q1 revenue of $1.27 billion-$1.35 billion, the midpoint above the consensus of $1.29 billion. 

Cisco Systems (CSCO) closed up more than +1% after HSBC upgraded the stock to buy from hold with a price target of $58.

Fox Corp (FOXA) closed up more than +1% after Wells Fargo Securities double-upgraded the stock to overweight from underweight with a price target of $46. 

Amcor Plc (AMCR) closed down more than -3% to lead losers in the S&P 500 after reporting Q4 net sales of $3.54 billion, weaker than the consensus of $3.59 billion.

Palo Alto Networks (PANW) closed down more than -2% to lead losers in the Nasdaq 100 after Evercore ISI named the stock a “tactical underperform” ahead of its earnings for next week.

Vistra Corp (VST) closed down more than -2% on signs of insider selling after an SEC filing showed EVP Moore sold $2.79 million of shares on Tuesday.

Pfizer (PFE) closed down more than -1% after its Covid-flu vaccine, co-developed with BioNTech SE, missed one of its goals in a final stage trial.

Earnings Reports (8/19/2024)

3D Systems Corp (DDD), Bit Digital Inc (BTBT), Estee Lauder Cos Inc/The (EL), Fabrinet (FN), Flexsteel Industries Inc (FLXS), Maui Land & Pineapple Co Inc (MLP), Palo Alto Networks Inc (PANW).

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