Stocks Surge as Fed Chair Powell Soothes Markets

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +2.62%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.37%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +4.26%. 

U.S. stock indexes on Wednesday rallied sharply, with the S&P 500 and Dow Jones Industrials posting 1-1/2 month highs.  Stock indexes opened higher Wednesday on better-than-expected quarterly earnings results from mega-cap technology companies.  Alphabet rose more than +7% after reporting stronger than expected Q2 advertising revenue. Microsoft rose more than +6% after saying it expects double-digit sales growth for the fiscal year 2023.  Also, Texas Instruments rose more than +6% Wednesday after forecasting stronger than expected Q3 revenue.  Q2 corporate earnings results have been mostly bullish for stocks, with 78% of reporting companies in the S&P 500 exceeding estimates.   

Stock indexes raced to their highs Wednesday afternoon on comments from Fed Chair Powell, who said that labor market job creation is "still robust" and "I do not think the U.S. is currently in a recession."  He added that the Fed will offer less "clear guidance" on future rate moves and will likely slow rate increases at some point.

The FOMC Wednesday unanimously voted to raise its federal funds target range by +75 bp to 2.25%-2.50% as expected and said that ongoing rate increases "will likely be appropriate."  The post-FOMC meeting statement said that "spending and production have softened," though "job gains have been robust in recent months."

Fed Chair Powell said the labor market is extremely tight and inflation much too high, and it is "essential" we bring inflation down to the Fed's 2% goal.

Wednesday’s U.S. economic data was mixed for stocks.  On the positive side, June capital goods new orders nondefense ex-aircraft, a proxy for capital spending, rose +0.5% m/m, stronger than expectations of +0.2% m/m.  Conversely, June pending home sales tumbled -8.6% m/m, weaker than expectations of -1.0% m/m and the biggest decline in more than 2 years.  Also, June wholesale inventories rose +1.9% m/m, higher than expectations of +1.5% m/m.

Today’s stock movers…

Strength in mega-cap technology stocks Wednesday boosted the overall market.  Alphabet (GOOGL) closed up by more than +7% after reporting Q2 advertising revenue of $56.29 billion, above the consensus of $55.91 billion.  In addition, Microsoft (MSFT) closed up by more than +6% to lead gainers in the Dow Jones Industrials after reporting Q4 commercial cloud revenue of $25.00 billion, better than the consensus of $24.99 billion, and saying it expects double-digit sales growth for the fiscal year 2023.  Also, Texas Instruments (TXN) closed up more than +6% after reporting Q2 revenue of $5.21 billion, stronger than the consensus of $4.55 billion. TXN forecast Q3 revenue of $4.90-$5.30 billion, with the midpoint above the consensus of $4.94 billion. 

Enphase Energy (ENPH) closed up more than +17% Wednesday to lead gainers in the S&P 500 after reporting Q2 revenue of $530.2 million, above the consensus of $505.9 million, and forecasting Q3 revenue of $590-$630 million, stronger than the consensus of $551.2 million.

PayPal Holdings (PYPL) closed up more than +12% Wednesday to lead gainers in the Nasdaq 100 after Bloomberg reported that Elliot Investment Management is building a stake in the company and will push PayPal to speed up its cost-reduction efforts.

Chipotle Mexican Grill (CMG) closed up more than +14% Wednesday after reporting Q2 adjusted EPS of $9.30, better than the consensus of $9.09. 

Hilton Worldwide Holdings (HLT) closed up more than +7% Wednesday after reporting Q2 adjusted EPS of $1.29, above the consensus of $1.05, and raising its full-year projections for adjusted EPS to between $4.21-$4.46 from previous guidance of $3.77-$4.02.   

Rockwell Automation (ROK) closed up more than +9% Wednesday after reporting Q3 adjusted EPS of $2.66, above the consensus of $2.32, and forecast full-year adjusted EPS of $9.30-$9.70 stronger than the consensus of $9.24. 

Sherwin-Williams (SHW) closed down more than -8% Wednesday to lead losers in the S&P 500 after reporting Q2 adjusted EPS of $2.41, weaker than the consensus of $2.78 and cut its full-year adjusted EPS forecast to $8.50-$8.80 from a prior view of $9.25-$9.65, well below the consensus of $9.42.

Kraft Heinz (KHC) closed down by more than -5% Wednesday to lead losers in the Nasdaq 100 after it reported it raised prices 12.4% across its portfolio in Q2 amid higher costs from transportation and commodities. However, Q2 sales volume fell -2.3%, signaling inflation is starting to undercut demand.

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed up +18 ticks, and the 10-year T-note yield fell -5.1 bp to 2.756%.  Sep T-notes Tuesday rallied moderately, and T-note yields moved lower after comments from Fed Chair Powell bolstered speculation the Fed would soon slow its pace of rate hikes.  Powell said that the Fed will offer less "clear guidance" on future rate moves and will likely slow rate increases at some point.

Limiting gains in T-note prices Wednesday was a rally in the S&P 500 to a 1-1/2 month high, which curbed the safe-haven demand for T-notes. Also, an increase in inflation expectations was bearish for T-notes after the 10-year breakeven inflation rate Wednesday rose to a 4-week high of 2.446%.

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