S&P 500 Rallies to a New Record High on US Economic Optimism

The S&P 500 Index ($SPX) (SPY) on Friday closed up +0.65%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.48%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.02%.  March E-mini S&P futures (ESH26) rose +0.61%, and March E-mini Nasdaq futures (NQH26) rose +0.96%.

Stock indexes rallied on Friday, with the S&P 500 posting a new all-time high amid optimism about the US economic outlook.  Signs of a resilient US labor market are supportive of the economy and stocks.  The Dec unemployment rate declined, and average hourly earnings rose more than expected, despite a smaller-than-expected increase in Dec nonfarm payrolls.  Stock indexes added to their gains after the University of Michigan's US Jan consumer sentiment index rose more than expected.

Several sectors rallied on Friday to support gains in the broader market.  Chipmakers and data storage companies rose.  Also, home builders and home building suppliers rallied after President Trump late Thursday called for Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds in an attempt to lower longer-term rates and spur housing demand.  In addition, power producers moved higher after Meta Platforms agreed to a series of electricity deals for its data centers. 

US stocks also benefited from carryover support from rallies in global equity markets.  Europe’s Euro Stoxx 50 climbed to a new record high on Friday, and China’s Shanghai Composite Stock Index rallied to a 10.5-year high.

The Supreme Court on Friday deferred on the legality of President Trump’s tariffs until next Wednesday.

US Dec nonfarm payrolls rose +50,000, weaker than expectations of +70,000.  Also, Nov nonfarm payrolls were revised lower to +56,000 from the previously reported +64,000.  The Dec unemployment rate fell -0.1 to 4.4%, showing a stronger labor market than expectations of 4.5%.

US Dec average hourly earnings rose +3.8% y/y, stronger than expectations of +3.6% y/y.

US Oct housing starts unexpectedly fell -4.6% m/m to a 5.5-year low of 1.246 million, weaker than expectations of 1.330 million.  Oct building permits, a proxy for future construction, fell -0.2% to 1.412 million, stronger than expectations of 1.350 million. 

The University of Michigan US Jan consumer sentiment index rose +1.1 to 54.0, stronger than expectations of 53.5.

The University of Michigan's US Jan 1-year inflation expectations were unchanged from Dec at 4.2%, stronger than expectations of a decline to 4.1%.  The Jan 5-10 year inflation expectations rose to +3.4% from 3.2% in Dec, stronger than expectations of 3.3%.

Friday’s comments from Atlanta Fed President Raphael Bostic were slightly hawkish when he said, "Inflation is too high, and we have to make sure that we don't lose sight of the fact that even labor markets have gotten cooler and more people are expressing concerns, that we still have this big concern around inflation."

The markets are discounting the odds at 5% for a -25 bp rate cut at the FOMC’s next meeting on January 27-28.

Overseas stock markets settled higher on Friday.  The Euro Stoxx 50 rallied to a new record high and closed up +1.58%.  China’s Shanghai Composite climbed to a 10.5-year high and closed up +0.92%.  Japan’s Nikkei Stock 225 closed up +1.61%.

Interest Rates

March 10-year T-notes (ZNH6) on Friday closed down by -1 tick.  The 10-year T-note yield rose +0.4 bp to 4.171%.  Mar T-notes fell to a 4-week low Friday, and the 10-year T-note yield rose to a 4-week high of 4.203%. 

Friday’s mixed US payroll report reduces the chance of a near-term Fed rate cut after the Dec unemployment rate ticked lower and average hourly earnings rose more than expected, factors that are hawkish for Fed policy.  Rising inflation expectations were also bearish for T-notes after the 10-year breakeven inflation rate rose to a 1.5-month high on Friday at 2.296%.  In addition, hawkish comments from Atlanta Fed President Raphael Bostic weighed on T-notes when he said, "Inflation is too high.”  Friday’s rally in the S&P 500 to a new record high also reduced safe-haven demand for T-notes.

T-noted recovered most of their losses Friday after the Supreme Court deferred on the legality of President Trump’s tariffs until next Wednesday.  If the Supreme Court were to strike down Mr. Trump’s tariffs, T-note yields could rise as the removal of tariff revenue worsens the US budget deficit.   

T-notes also found support after President Trump late Thursday called for Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds in an attempt to lower longer-term rates and spur housing demand. 

European government bond yields were mixed on Friday.  The 10-year German bund yield was unchanged at 2.863%.  The 10-year UK gilt yield fell to a 2.5-month low of 4.373% and finished down -3.0 bp to 4.374%.

Eurozone Nov retail sales rose +0.2% m/m, stronger than expectations of +0.1% m/m, and Oct retail sales were revised upward to +0.3% m/m from the previously reported unchanged m/m.

German Nov industrial production unexpectedly rose +0.8% m/m, stronger than expectations of -0.7% m/m.

ECB Governing Council member Dimitar Radev said, "The current level of interest rates can be assessed as appropriate in terms of the available information and the inflation outlook."

Swaps are discounting a 1% chance of a +25 bp rate hike by the ECB at its next policy meeting on February 5.

US Stock Movers

Chipmakers and data storage companies rose on Friday, helping lift the broader market.  Sandisk (SNDK) closed up more than +12% to lead gainers in the S&P 500, and Intel (INTC) closed up more than +10% to lead gainers in the Nasdaq 100.  Also, Lam Research (LRCX) closed up more than +8%, and Applied Materials (AMAT) closed up more than +7%.  In addition, ASML Holding NV (ASML), Seagate Technology Holdings Plc (STX), and Western Digital (WDC) closed up more than +6%, and KLA Corp (KLAC) and Micron Technology (MU) closed up more than +5%.  Finally, Broadcom (AVGO) and Microchip Technology (MCHP) closed up more than +3%.

Home builders and building suppliers rallied Friday after President Trump called for Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds in an attempt to lower longer-term rates and spur housing demand.  Builders FirstSource (BLDR) closed up more than +12%, and Lennar (LEN) closed up more than +8%.  Also, PulteGroup (PHM), DR Horton (DHI), and Toll Brothers (TOL) closed up more than +7%, and KB Home (KBH) closed up more than +6%.  In addition, Home Depot (HD) closed up more than +4% to lead gainers in the Dow Jones Industrials. 

Power producers are soaring today after Meta Platforms agreed to a series of electricity deals for its data centers.  Vistra (VST) closed up more than +10%, and Oklo (OKLO) closed up more than +8%.  Also, Constellation Energy (CEG) closed up by more than +6%, and NuScale Power (SMR) and NRG Energy (NRG) closed up by more than +4%.

Retailers retreated today after the Supreme Court deferred a ruling on the legality of President Trump’s tariffs, leaving market uncertainty.  Kohl’s (KSS) closed down more than -5%, and Lululemon Athletica (LULU) and American Eagle Outfitters (AEO) closed down more than -3%.  Also, Best Buy (BBY) closed down more than -1%. 

Revolution Medicines (RVMD) closed up more than +10% after the Financial Times reported that Merck & Co is in talks to buy the company.

Rocket Cos (RKT) closed up more than +9% after President Trump said he was directing Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds.

Lockheed Martin (LMT) closed up more than +4% after Truist Securities upgraded the stock to buy from hold with a price target of $605.

Carvana (CVNA) closed up more than +4% after Morgan Stanley raised its price target on the stock to $750 from $700.

Southwest Airlines (LUV) closed up more than +3% after JPMorgan Chase double-upgraded the stock to overweight from underweight with a price target of $60. 

Insmed Inc (INSM) closed up more than +3% after announcing it expects 2026 global ARIKAYCE revenues between $450 million and $470 million, above 2025 guidance of $433.8 million. 

AXT Inc (AXTI) closed down more than -10% after forecasting Q4 revenue of $22.5 million to $23.5 million, well below the consensus of $28.8 million.  

WD-40 Co. (WDFC) closed down more than -6% after reporting Q1 EPS of $1.28, weaker than the consensus of $1.45.

HealthEquity (HQY) closed down more than -4% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $89.

Equity Residential (EQR) closed down more than -3% after BMO Capital Markets downgraded the stock to market perform from outperform. 

Qualcomm (QCOM) closed down more than -2% after Mizuho Securities downgraded the stock to neutral from outperform and lowered its price target to $175 from $200.

Mattel (MAT) closed down more than -2% after Goldman Sachs downgraded the stock to neutral from buy.

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