The record-breaking rebound in U.S. equities is still being driven by big tech, not the Federal Reserve. This gives some investors faith that the market will be able to overcome worries about the outlook for interest rates and continue rising.
After setting several record closing highs last week, the tech-heavy S&P 500 index SPX and the Nasdaq Composite COMP concluded Friday with strong weekly gains. According to FactSet data, the Nasdaq saw its biggest weekly rise since April 26 and the S&P 500 recorded its best week in over a month.
During its WWDC developers conference, Apple Inc.’s AAPL, -0.82% roughly 8% weekly rise on the news of the iPhone maker’s push into artificial intelligence helped to fuel the rally. Additionally, the business momentarily overtook Microsoft Corp. MSFT, +0.22% as the most valued American corporation.
Other megacap tech firms also saw gains. Microsoft Corp. saw a 4.4% increase last week, and Nvidia Corp. (NVDA, +1.75%) saw a 9% increase in value following a recent 10-for-1 stock split. FactSet data shows that the Technology Select Sector SPDR Fund XLK had its greatest weekly return since November.
Some investors think that interest-rate worries no longer apply to Big Tech companies because of the seemingly unstoppable rise of megacap technology titans, or that the momentum of AI is strong enough to compensate for economic weakness.
Although the stock market finds that scenario tempting, market analysts believe it is unlikely to come to pass since the Fed is still far from winning the war on inflation.
The markets were somewhat surprised a few hours later when the Fed projected only one rate reduction before the end of 2024, down from the three cuts policymakers anticipated in their previous March projection. Last Wednesday, the softer-than-expected U.S. May CPI data had the markets believing that two interest-rate cuts this year were set in stone.
However, the stock market seems unmoved. “A very low CPI print and then a very hawkish Fed were two things that came out on the same day, so they offset each other to some extent,” said Macquarie Group’s global interest rates and currencies strategist Thierry Wizman. “The idea that one of the cuts that were projected for 2024 was moved to 2025 instead was accepted by the market.”
It’s still “a waiting game,” Wizman told MarketWatch, since it takes many “low-side inflation prints” for the decision-makers to concede that they are at ease with the disinflationary process. “I don’t believe the rate cut countdown has begun.”
The expectation that the Fed will intervene to support policy and ease financial conditions whenever the economy falters in order to keep the markets afloat is another reason for the stock market’s resiliency.
Portfolio manager and fixed-income analyst John Luke Tyner of Aptus Capital Advisors stated, “They’ve [the Fed] got a lot of ammo in their arsenal to cut rates to stop quantitative tightening, so if the labor market gets shaky, or if the economy takes a turn for the worse, they’ve got a lot of options to work with.” “This is another thing that can prevent a significant correction in the market.”
Although the central bank has not endorsed the so-called “Fed put,” participants in the financial markets have grown to accept it during the previous few decades. In his prepared remarks on Wednesday, Fed Chair Jerome Powell stated, “We are prepared to respond if the labor market were to weaken unexpectedly or if inflation were to fall more quickly than anticipated.”
It’s important to note that the recent drop in Treasury yields contributed to the outperformance of technology firms, but strategists predicted that AI stocks would likely hold their value through an economic downturn.
Reduced rates “would still be important to keep the tech rally alive, but I don’t think AI stocks will be the first to be sold even in the event of an economic downturn,” according to Wizman. “The story of artificial intelligence is still very much in its infancy and will continue.”
In spite of potential negative effects on the U.S. economy as a whole, he continued, investments in the AI sector will continue over the next three years, making revenue growth for these companies “resilient.” According to Wizman, “that’s why, in terms of earnings generation, they [AI stocks] seem very safe.”
Last Friday marked the fourth straight session that longer-term Treasury yields declined, with the ten- and 30-year rates BX:TMUBMUSD30Y hitting their lowest points in over two months. According to FactSet data, the yield on the 10-year Treasury BX:TMUBMUSD10Y fell 2.7 basis points to 4.212% on Friday, retreating 21.6 basis points for the week.
Treasury yields are a good indicator of how the markets are feeling about the state of the economy; higher yields on long-term government obligations indicate a more positive view, while lower yields indicate a more pessimistic one.
The 10-year yield closing below the 4.35% mark on a weekly basis, according to Jay Woods, chief global strategist at Freedom Capital Markets, should indicate “a beginning of a near-term downtrend” for yields. It should also be encouraging for small-cap stocks RUT and other S&P 500 non-tech stocks that are lagging behind the rally to catch up.
But, Woods told MarketWatch over the phone that the breadth is still lacking and that investors are still witnessing “one pocket [of tech stocks] doing the heavy work” rather than the stock market experiencing “a more broad-based rally.”
Consumers, on the other hand, are a major force behind the American economy, and investors are keeping an eye out for any early signs of a slowdown in consumer spending. With Wednesday being a national holiday in the United States, that made the release of the May retail sales report the main event of this next holiday-shortened week.
After staying flat the previous month, consumer spending is predicted to increase by 0.2% in May, according to Wall Street Journal analysts surveyed. Retail sales in April were flat, contrary to economists’ 0.4% prediction of growth in sales. This increased worries that consumers would have to temper their spending binge as a result of rising interest rates and persistent inflation.
“Instead of just a few trends, which have been fairly sporadic, we need to see more retail data continue to deteriorate,” Tyner of Aptus Capital Advisors said over the phone with MarketWatch on Thursday.
However, if job pressure persists, the customer will face difficulties. In general, the markets are rather well supported as long as customers have employment. You may avoid becoming overly pessimistic by adhering to that structure, the man continued.
According to FactSet statistics, the S&P 500 increased 1.6% last week, the Nasdaq up 3.2%, and the Dow Jones Industrial Average DJIA decreased 0.5% within the same time frame.
