S&P 500 Breaks Below 5,100 As Big Tech Sells Off: Markets Wrap

(Bloomberg) -- Tech megacaps dragged down stocks as bond yields jumped after hot retail sales spurred bets the Federal Reserve will be in no rush to cut rates. Oil whipsawed on geopolitical angst.

In a volatile session, the S&P 500 erased an earlier advance and fell over 1%. Microsoft Corp., Apple Inc. and Nvidia Corp. led declines in the rate-sensitive technology space. Volatility perked up, with the premium for one-month put options to protect against a pullback in US equities hitting the highest since October. Wall Street’s “fear gauge” — the VIX — hit levels unseen this year.

“Stocks began to violate uptrends and pull back,” said Craig Johnson at Piper Sandler. “Interest rates are expected to stay higher for longer. A more cautious and tactical approach is favored as earnings season gets underway.” 

The S&P 500 broke below 5,100, dropping to the lowest in almost two months. The tech-heavy Nasdaq 100 slid over 1.5%. Both gauges breached their 50-day moving averages — seen as a bearish signal by several chartists. Banks outperformed on a surprise profit from Goldman Sachs Group Inc.

Treasury 10-year yields spiked nine basis points to 4.62%, while those on two-year notes came closer to 5%. Bonds were also under pressure as JPMorgan Chase & Co. and Wells Fargo & Co. tapped the US high-grade bond market, the first in a likely parade of bond sales from banks after results. 

West Texas Intermediate reclaimed its $85 mark — after briefly falling below it — and gold climbed on fears of escalating tensions in the Middle East. Top Israeli military officials reiterated the country has no choice but to answer Iran’s weekend attack.

US retail sales rose by more than forecast in March and the prior month was revised higher, showcasing resilient consumer demand that keeps fueling a surprisingly strong economy. As long as a robust labor market supports household demand, there’s a risk that inflation will become entrenched.

“If the S&P 500 is going to avoid its first three-week losing streak since last September, investors will need to move past concerns that rate cuts will be delayed because of sticky inflation,” said Chris Larkin at E*Trade from Morgan Stanley. “In the near-term, that could come down to the tone set by the first full week of earnings season, but geopolitical tensions in the Middle East remain a wild card.”

The strong tailwind from easy financial conditions continues to boost inflation and growth, including consumer spending in March, said Torsten Slok at Apollo Global Management, who continues to bet the Fed will not cut interest rates in 2024.

“The markets have been buoyed by strong corporate profits and the elixir of lower rates, but it seems like those two things are increasingly at odds with each other, so we would exercise some caution in the near term,” said Chris Zaccarelli at Independent Advisor Alliance.

Expectations for monetary policy have been shifting toward a later start to Fed rate cuts, which officials have said requires a higher degree of confidence that inflation is on a sustainable path back toward their 2% target. Traders are no longer fully pricing in a rate cut before November.

“In our view it’s not about ‘higher for longer’ when it comes to the Fed’s rate regime rather, it’s a continuation of the ‘pause for now’ until inflation gives up its stickiness,” said John Stoltzfus at Oppenheimer Asset Management.

Due to the heightened concern that the Fed will be “slower to lower” interest rates, investors now worry that these sticky inflation readings will be viewed as a catalyst for correction, said Sam Stovall at CFRA.

For all 24 corrections since World War II, it took the S&P 500 only four months to recover all that was lost in the decline, he added. Better yet, since 1990, the market got back to breakeven in only three months. 

“Therefore, history once again reminds us that, for long-term investors, it has typically been better to buy than bail,” Stovall said.

Stubborn inflation, a robust economy and signals from Fed officials that interest rates will remain higher for longer have derailed traders’ optimism for an interest rate cut by summer. But that doesn’t mean they’re necessarily worried about the stock market.

Soothsayers at Jefferies JPMorgan Chase & Co., Citigroup Inc. and State Street Corp. agree that the strength in economic data and corporate earnings is enough to keep this year’s stock market rally going — whether or not interest rates are dialed back.

Stickier inflation stemming from strong economic momentum is better for US equities than stagflation, according to Bank of America Corp. strategists led by Ohsung Kwon.

“If inflation is sticky because of momentum in the economy, that’s not necessarily bad for stocks,” they wrote, adding “but stagflation is.”

“Recent inflation data has laid to rest the notion of a Goldilocks US economy. Instead, investors and the Fed will have to put up with a bumpier disinflation path than they assumed at the start of the year,” said Jason Draho at UBS Global Wealth Management. “But overall macro conditions of trend-level growth, slow and bumpy disinflation, and a Fed ready to exercise its put of rate cuts is still supportive for risk assets.”

Don’t bank on an upbeat corporate earnings season to drive equities higher as much of the optimism is already priced in following the record-breaking rally this year, according to JPMorgan Chase & Co. strategists led by Mislav Matejka wrote.

“Equities have already had a good run into the results, suggesting that investors are more optimistic than the downbeat earnings projections by sell-side analysts convey,” they said. “We need to see clear earnings acceleration in order to justify current equity valuations, which we fear might not come through.”

Strategists at BlackRock’s Investment Institute see signs of earnings growth broadening beyond US technology behemoths to other sectors like industrials and materials in this reporting period. 

Strong economic data and corporate earnings have supported risk appetite so far this year despite a jump in bond yields, but “earnings will need to deliver on high expectations,” team led by global chief investment strategist Wei Li said Monday in a weekly commentary note.

An improving outlook for the US economy and continued easy financial-market conditions have prompted Wells Fargo Investment Institute to boost its outlook for the US stock market and corporate earnings estimates.

The investment adviser raised its S&P 500 Index 2024 year-end forecast to range of 5,100 to 5,300. 

“A point of emphasis is that these year-end targets allow for potential market disappointments related to the track of inflation and the federal funds rate,” strategists at WII wrote.

Corporate Highlights:

• Two of Tesla Inc.’s top executives have left in the midst of the carmaker’s largest-ever round of job cuts, as slowing electric-vehicle demand leads the company to reduce its global headcount by more than 10%.
• Lockheed Martin Corp. beat rival Northrop Grumman Corp. in a $17 billion contest to continue development and eventual production of the US’s next-generation missile interceptor warhead, according to two people familiar with the decision.
• M&T Bank Corp. boosted its 2024 outlook for net interest income, a key source of revenue.
• The union for American Airlines Group Inc. pilots warned members to be vigilant amid a “significant spike” in safety- and maintenance-related problems at the carrier.
• Clearlake Capital Group LP has made a sweetened bid to acquire Blackbaud Inc., offering $80 a share about a year after its last approach was rebuffed by the cloud software provider.
• Charles Schwab Corp.’s first-quarter net revenue topped estimates as the retail brokerage tries to put 2023’s turbulence behind it.

Key events this week:

• China property prices, retail sales, industrial production, GDP, Tuesday
• Germany ZEW survey expectations, Tuesday
• US housing starts, industrial production, Tuesday
• Morgan Stanley, Bank of America earnings, Tuesday.
• Fed Vice Chair Philip Jefferson speaks, Tuesday
• BOE Governor Andrew Bailey speaks, Tuesday
• IMF publishes its latest world economic outlook, Tuesday
• Eurozone CPI, Wednesday
• Fed issues its Beige Book, Wednesday
• Cleveland Fed President Loretta Mester speaks, Wednesday
• Fed Governor Michelle Bowman speaks, Wednesday
• BOE Governor Andrew Bailey speaks, Wednesday
• Taiwan Semiconductor earnings, Thursday
• US Conf. Board leading index, existing home sales, initial jobless claims, Thursday
• Fed Governor Michelle Bowman speaks, Thursday
• New York Fed President John Williams speaks, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.2% as of 4 p.m. New York time
• The Nasdaq 100 fell 1.6%
• The Dow Jones Industrial Average fell 0.7%
• The MSCI World index fell 1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.2% to $1.0625
• The British pound was little changed at $1.2447
• The Japanese yen fell 0.7% to 154.24 per dollar

Cryptocurrencies

• Bitcoin fell 0.8% to $63,338.62
• Ether rose 1.1% to $3,101.54

Bonds

• The yield on 10-year Treasuries advanced nine basis points to 4.62%
• Germany’s 10-year yield advanced eight basis points to 2.44%
• Britain’s 10-year yield advanced 10 basis points to 4.24%

Commodities

• West Texas Intermediate crude was little changed
• Spot gold rose 1.7% to $2,385.37 an ounce

This story was produced with the assistance of Bloomberg Automation.

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