S&P 500 Is Back At 5,200 As Big Tech Sells Off: Market Closed

(Bloomberg) — A crisis at the world’s biggest technology companies sent stocks tumbling, as the market pared a monthly rally fueled by hopes that a slowdown in inflation would lead to rate cuts from the Federal Reserve.

Bloomberg’s Most Read

The S&P 500’s most influential group came under pressure this week after results from some prominent names such as Dell Technologies Inc. and Salesforce Inc. failed to impress investors. All megacaps fell on Friday, with the tech-heavy Nasdaq 100 falling nearly 2%.

“From leaders to losers…for now,” said Dan Wantrobski of Janney Montgomery Scott. “We are seeing drops in initial support in some areas of leadership. Net-net, we still expect a rough ride for U.S. stocks as we enter the month of June.”

Meanwhile, Treasuries were on track for their best month in 2024, with the key indicator of personal consumption expenditure prices in line with estimates while posting the smallest gain this year. What’s more, spending dropped unexpectedly. For a data-dependent Fed, the report was seen by traders as “not too bad,” “slightly constructive” and “marginally dovish.”

“While we don’t necessarily want to see a weakened consumer, reduced retail spending should help fan the flames for lower rates in the second half of 2024,” said eToro’s Bret Kenwell. “We’re not there yet, but the inflation reports were a constructive first step.”

The S&P 500 hovered near 5,200. US 10-year yields fell four basis points to 4.51%. The dollar fluctuated.

Investors betting that technology giants will continue to fuel the stock rally could face a difficult situation when other sectors begin to catch up, according to strategists at Bank of America Corp.

Value’s outperformance relative to growth stocks as market breadth improves could be the next “painful trade” for investors, strategists including Michael Hartnett and Elyas Galou wrote in a note.

Other possible sensitive spots on the horizon include a decline in U.S. stocks and a widening in investment-grade bond spreads, Galou said in an email.

The six largest U.S. companies now control a larger share of the S&P 500 than ever before.

Microsoft Corp., Apple Inc., Nvidia Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. account for 30% of the benchmark, up from about 26% at the start of the year, according to data compiled by Bloomberg. The S&P 500 is weighted by the market capitalizations of stocks.

The story continues

The so-called core PCE, which excludes volatile food and energy components, rose 0.2% from the previous month. Inflation-adjusted consumer spending unexpectedly fell 0.1%, driven by a decrease in spending on goods and a reduction in spending on services. Wage growth, the main fuel for demand, moderated.

“Markets see inflation on a slow but steady downward trajectory,” said Quincy Krosby of LPL Financial. “The question remains how much more the Fed needs in terms of slower inflation before it starts an easing cycle.”

For Chris Larkin, of E*Trade at Morgan Stanley, investors will have to remain patient.

“The Fed has suggested that it will take more than a month of favorable data to confirm that inflation is reliably falling again, so there is still no reason to think that a first rate cut will come before September,” he noted.

Overnight index swap contracts tied to upcoming Fed policy meetings continue to fully price in a quarter-point rate cut in December, with the odds of a change as early as September rising to around 50%. For all of 2024, the contracts imply a total of 34 basis points of rate reductions, slightly above Thursday’s close.

While the PCE data will likely be well-received by the Fed, the core indicator has still risen at an annualized rate of 3.5% over the past three months, according to David Donabedian of CIBC Private Wealth.

“So it’s too early for any kind of Fed victory,” he noted.

In fact, inflation may not return to the US central bank’s 2% target until mid-2027, according to research from the Fed Bank of Cleveland.

That’s because the inflationary impacts of pandemic-era shocks have largely been resolved and the remaining forces keeping inflation high are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report on Thursday.

Another aspect is that consumer spending in the first month of the new quarter slowed as real disposable income fell, noted LPL Financial’s Jeff Roach.

“Companies need to prepare for an environment where consumers do not waste like last year,” he noted.

“We are in a be careful what you wish for moment, because if slowing consumer spending leads to lower inflation and the Fed is able to cut back slowly as a result, then that will be good for markets,” he said.

For Chris Zaccarelli, from the Independent Advisor Alliance, the markets are in a “be careful what you wish for” moment.

“If the slowdown in consumer spending leads to lower inflation and as a result the Fed is able to cut slowly, then that will be good for markets,” he said. “However, if consumer spending – and the economy – slows too quickly, corporate profits and stock prices will fall much faster than the Fed will be able to cut rates, so we would be cautious at this point.”

Wall Street reacts to inflation data:

Investors were hoping that the surge in inflation we saw at the beginning of the year would dissipate, and that appears to be happening.

PCE data confirms that price increases are not as persistent as feared, keeping hopes of at least one rate cut on the table.

April’s PCE data was a welcome relief after a string of hotter-than-expected inflation data in the first quarter, with headline and core inflation coming in as expected.

So the overall outlook for inflation looks good, with disinflation on the horizon, and this likely keeps the Fed on track to cut twice this year, starting in September.

Yields fell in response to the PCE data only because there was no surprise with the data in line. Perhaps also with the value of expenses a little lower than expected, as REAL expenses fell a little.

Overall, the April PCE report is somewhat peaceful. We needed to see more progress on disinflation to make the case for multiple rate cuts in 2024.

Good news, right? Not exactly. Inflation in April was better than in March; It’s still not good enough.

Inflation progress in April was not yet good enough to initiate the type of three-month tapering that we consider necessary for the Fed to taper.

Corporate Highlights:

• Carl Icahn has built up a sizable position in Caesars Entertainment Inc., according to people familiar with the matter, raising the prospect of a new dispute with the U.S. hotel and casino operator.

• Hedge fund manager Bill Ackman is selling a stake in Pershing Square as a prelude to a planned initial public offering of his investment firm, according to a person familiar with the matter.

• Gap Inc. reported better-than-expected results and raised its full-year outlook, showing that the apparel retailer’s attempt to rebuild the business is moving forward.

• Penn Entertainment Inc. soared after an activist investor called for the casino company to be sold, saying a failed deal and a growing pattern of misguided guidance had damaged management’s credibility.

• Moderna Inc. has won U.S. approval for its RSV vaccine in older adults, giving the biotechnology company a second product as it looks to move beyond its reliance on the declining Covid-19 market.

• Hess Corp. shareholders approved the company’s proposal to be acquired by Chevron Corp. for US$53 billion by a slim majority of 51% of outstanding shares.

Some of the main movements in the markets:

Actions

• The S&P 500 was down 0.6% at 12:57 p.m. New York time

• The Nasdaq 100 fell 1.6%

• The Dow Jones Industrial Average rose 0.3%

• The MSCI World index fell 0.4%

Coins

• The Bloomberg Dollar Spot index was little changed

• The euro rose 0.2% to $1.0849

• The British pound remained unchanged at $1.2732

• The Japanese yen fell 0.2% to 157.17 per dollar

Cryptocurrencies

• Bitcoin fell 2% to $67,099.2

• Ether rose 0.4% to $3,753.15

Titles

• The 10-year Treasury yield fell four basis points to 4.51%

• Germany’s 10-year yield rose one basis point to 2.66%

• Britain’s 10-year yield fell three basis points to 4.32%

goods

• West Texas Intermediate crude fell 0.7% to $77.38 a barrel

• Spot gold fell 0.4% to $2,332.78 an ounce

This story was produced with help from Bloomberg Automation.

–With assistance from Sagarika Jaisinghani.

Bloomberg Businessweek Most Read

©2024 Bloomberg LP

Source