Opening Market Update

Published as of: June 14, 2024, 9:15 a.m. ET

(Friday market open) Elevators can't go straight up forever, as Friday's early Wall Street declines indicated after four consecutive record-setting days. The early selling could reflect buyers' exhaustion, though political developments in Europe that rattled markets there might also play a role.

"Stocks have been in 'melt-up' mode," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "However, with Q2 earnings season a month away, a lack of near-term catalysts to push stocks higher, a fully priced market multiple, and technically overbought status in tech leadership, risk/reward is skewed to the downside from a near-term trading basis, so some mean reversion over the next week or so wouldn’t surprise me."

Flag Day kicks off with the S&P 500^® index (SPX) up 1.6% so far this week and on pace for its seventh weekly gain in the past eight. It's up 9% from the April closing low and almost 14% year to date. 

Factors driving recent bullish momentum include Nvidia's (NVDA) 10-to-1 stock split, a split by semiconductor giant Broadcom (AVGO), falling Treasury yields thanks to improved inflation metrics, and a positive response to Apple's (AAPL) developer's conference. Gains are skewed mainly to the tech sector, though mega caps are mostly lower this morning.

Treasury yields fell and the dollar climbed early Friday in what Briefing.com noted might reflect a "flight to safety" amid European political uncertainty.

Major catalysts look sparse now that inflation data, several large tech earnings reports, and central bank meetings are over. It's also still a month until earnings season. Trading was light yesterday and may remain so ahead of the weekend as the market consolidates another leg of the rally.

Data later today include preliminary June consumer sentiment, due soon after the open.

Futures based on the SPX slipped 0.4% shortly before the close of overnight trading, while Nasdaq-100^® (NDX) futures dropped 0.1%. Futures based on the Dow Jones Industrial Average^® ($DJI) fell 0.7%.

• The 10-year U.S. Treasury yield (TNX) dropped nearly two basis points to just over 4.22%.
• The U.S. Dollar Index ($DXY) rose to a new one-month high of 105.69 amid European political uncertainty and after the Bank of Japan (BoJ) kept rates unchanged.
• The Cboe Volatility Index^® (VIX) jumped to 12.74.
• WTI Crude Oil (/CL) climbed 0.4% to $78.91 per barrel.
• Bitcoin (BTC) went up 0.6% to $67,084.

Volatility, after catching a wave in late May, declined Thursday to nearly one-month lows, indicating a relative lack of uncertainty among investors and possibly less dramatic market swings.

Import and export prices for May out this morning continued the week's cooler inflation theme, with import prices down 0.4% and export prices down 0.6%. Those compared with gains of 0.9% and 0.6% in April. This follows easing consumer and wholesale inflation data released Wednesday and Thursday.

The Bank of Japan left rates unchanged at a low range of 0% to 0.1% at the conclusion of its meeting today and voted to reduce bond purchases over the next one to two years. The bond purchases, part of an effort to keep rates low, contrast with years of tightening by other central banks. Japanese bond yields slipped after the meeting and remain very low compared with U.S. yields.

"The BoJ is an outlier, but in the near term, the yen and Japanese stocks are still tied to what the Fed is doing," said Michelle Gibley, director of international research at the Schwab Center for Financial Research. "The reason is that the pace of BOJ rate hikes is likely to be slow, keeping the yield differential to U.S. rates wide."

European shares are ending the week mostly lower amid political concerns, with bank stocks under particular pressure. Shares in Japan ended the week higher but China saw losses.

Back home, Cleveland Fed President Loretta Mester told CNBC today she was glad to see recent lower inflation data and thinks there's been good progress made. It needs to continue before the Fed can feel comfortable lowering rates, however. She added it would be inappropriate to keep rates at current levels until inflation falls all the way to the Fed's 2% inflation target, and it's important not to wait too long to reduce rates.

The University of Michigan preliminary June U.S. Consumer Sentiment data being released soon after the open today could show a rise in the headline reading to 73 from 69.1 in May, according to consensus from Briefing.com. May was the lowest in five months.

Inflation expectations from these reports often draw scrutiny, and last month featured year-ahead inflation expectations falling to 3.3% from the preliminary 3.5%. The May Consumer Price Index (CPI) report Wednesday showed inflation easing for consumers, so one question is if the sentiment data back that up. Fed Chairman Jerome Powell said this week that inflation expectations are "well anchored." 

Week ahead: With shelter and food costs still elevated despite recent inflation progress, it seems fitting that the major earnings next week come from home builders, restaurants, and grocers.

Next week's a big one for housing, kicking off Monday afternoon with expected earnings from homebuilder Lennar (LEN) and continuing in following days with readings on housing starts, building permits, and existing home sales for May. KB Home (KBH) also reports. The recent lighter-than-expected inflation data that pushed Treasury yields lower came as welcome news for housing stocks, which rose late this week on hope mortgage rates might come down.

Along with housing, consumer demand is in the microscope Tuesday morning when investors receive the May U.S. Retail Sales report. Retail sales were flat monthly in April, though they rose 0.2% excluding autos and gas. Consumers pulled back spending at non-store retailers that month, meaning internet outlets, so Tuesday's report could show if that revived in May. 

Motor vehicle sales also suffered in April and could be interesting to check this time around to see if consumers flocked back to dealers after a strong first quarter. General Motors (GM), Ford (F), Toyota (TM), and Tesla (TSLA) report quarterly vehicle sales in early July. 

Earnings update: Later today, investors are likely to get the latest S&P 500 earnings estimates from research firm FactSet. The rearview mirror on Q1 earnings is becoming less meaningful now that we're only a month out from Q2 reporting season. Watch for any updates in expectations for Q2 and beyond as analysts and companies make adjustments. As of last week, a higher percentage of companies than normal were guiding negatively for Q2 earnings per share.

Info tech earnings scored a hat trick this week.

Adobe (ADBE) became the third info tech company to see shares rise double-digits following quarterly results in premarket trading after its earnings late Thursday. Oracle (ORCL) and Broadcom started the power play. Adobe, a design software maker, easily surpassed Wall Street's average earnings per share (EPS) estimate and narrowly beat revenue estimates. Shares rallied nearly 14% ahead of Friday's open.

More importantly, perhaps, it offered better guidance than a quarter earlier when a slightly soft outlook tripped up the stock. For the current fiscal Q3, Adobe sees EPS exceeding analysts' average range, though it projects revenue below the FactSet Consensus. It also raised its fiscal 2024 EPS guidance. Adobe cited "strong growth across Creative Cloud, Document Cloud, and Experience Cloud," in a press release.

Stocks on the move:

• Nucor (NUE) fell 2% in premarket trading after the steelmaker announced second-quarter earnings would be well below year-ago levels and Wall Street analysts' projections. Nucor said the largest driver of the expected decrease is lower earnings of the steel mills segment due to lower average selling prices. Other steel makers, including Cleveland-Cliffs (CLF) and U.S. Steel (X), fell in sympathy.
• RH (RH) plunged 12% early Friday after the luxury furniture maker reported a wider-than-expected quarterly loss and shared disappointing guidance. Struggles in the furniture sector could reflect tightness in the housing market. The company said it's been "aggressively investing during a downturn," which puts pressure on short-term results and that business conditions "remain challenging" due partly to high interest rates.

Thursday in review: Two of the four major U.S. indexes set fresh record highs again Thursday, but small caps were weak. Even the SPX's and NDX's gains weren't dramatic compared with their surges earlier this week, and signs of possible exhaustion gather ahead of the weekend. Volume was lower than normal yesterday and declining shares easily led advancers. Without semiconductor strength powered by Broadcom, all the major indexes might have fallen.

Semiconductors led yesterday behind a 12% rally in shares of Broadcom. The PHLX Semiconductor Index (SOX) jumped 1.5% and ended at a record close for a fourth consecutive day. Energy companies were among the weakest sectors as crude oil prices fell. Rate-sensitive sectors like utilities and staples finished up as Treasury yields fell to new two-month lows following the PPI data.

Early today, futures traders build in 14% chances that the benchmark funds rate will fall 25 basis points at the FOMC's July 30–31 meeting, based on the CME FedWatch Tool. Chances of a rate cut by September were 72%.

Ideas to mull as you trade or invest

Jobs dichotomy: The latest Nonfarm Payrolls data extended a widening gap between the two surveys (business and household) the government undertakes to provide the report. Payrolls data, which come from the government's survey of company payrolls, suggests that 6.9 million jobs have been created over the last two years. But the government's survey of households tells a different story at less than half of that, or 3.2 million jobs created.  "For what it's worth, the household survey tends to be more accurate at important turning points in the cycle in both directions," wrote Liz Ann Sonders, Schwab's chief investment strategist, and Kevin Gordon, director, senior investment strategist, in their recent mid-year outlook. The household survey is used to determine the unemployment rate, which rose to 4% in May, ending a 27-month stretch below that level. On a related note, Fed Chairman Powell said Wednesday that "payrolls have been coming in strong but there's an argument they're a bit overstated. We see gradual cooling and a move back toward better balance."

China weekend: Before all that, don't forget to check in Monday morning for weekend data from China including home prices, industrial production, retail sales, and unemployment. Those numbers could be important, especially after the last industrial production reading of 6.7% in April came in well above forecasts and hinted at some recovery in the manufacturing sector there. "China’s economy is slowly recovering, but the property slowdown remains a headwind," said Schwab's Gibley. "Exports have rebounded and deflation has disappeared. However, growth remains unbalanced, with strength in manufacturing while consumer spending is restrained amid low consumer confidence. The softness in the property market—where prices continue to fall—is a headwind to consumer confidence and spending."

Breadth check: The SPX's price-to-earnings (P/E) multiple is near 21, a historically high level that could cause worries if earnings disappoint later this year. Additionally, market leadership remains narrow. The percentage of SPX stocks above their respective 200-day simple moving averages is currently 69%, versus nearly 86% at the end of March, even though the SPX has continued to notch fresh all-time highs. This indicates leadership from a small set of mega cap stocks that pull the indexes higher even while many smaller members tread water.
 

June 17: Expected earnings from Lennar (LEN).

June 18: May Retail Sales, May Industrial Production and Capacity Utilization, expected earnings from KB Home (KBH).

June 19: U.S. markets closed for observance of Juneteenth.

June 20: May building permits and housing starts, and expected earnings from Darden Restaurants (DRI) and Kroger (KR).

June 21: May existing home sales, may leading indicators, and expected earnings from CarMax (KMX).