Speakers Bureau: Four Fed Policy Makers Share Thoughts Today, Diverting Focus from Earnings to Rate Policy

Earnings season continued with strong results from Eli Lilly (LLY) and Palantir (PLTR) this morning, but stocks wavered as investors awaited four Fed speakers and a Treasury auction. Amgen and Ford report later while data are thin.

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Key Takeaways

  • Better-than-expected results from Palantir, Eli Lilly, Spotify send shares up early

  • Four Fed speakers and a Treasury auction on today’s schedule, raising yield worries

  • Data calendar still light, putting more focus on geopolitics and Fed policy

(Tuesday market open) Despite better-than-expected earnings from Eli Lilly (LLY) and Palantir (PLTR), major indexes wavered early Tuesday as investors awaited a host of Federal Reserve speakers and nervously watched Treasury yields.

Today’s schedule includes four Fed policy makers in the wake of Fed Chairman Jerome Powell’s reiteration Sunday that a March rate cut is all but dead on arrival. Powell is sometimes considered one of the more “dovish” members of the Federal Open Market Committee (FOMC), so it wouldn’t be surprising to hear even more hawkish views today. The market now prices in less than a 17% chance of a rate cut next month, down from 70% a few weeks ago.

Lilly shares jumped 5% in premarket trading and Palantir cruised to 17% gains to continue what’s generally been a solid earnings season. Lilly is one of the largest stocks on Wall Street by market capitalization and rose 60% last year, part of a persistent pattern where the biggest companies march higher while average-sized stocks tread in place or lose ground.

“Bad breadth” remains an issue, with market concentration focused in the 10 largest companies. In fact, the 10 leading S&P 500 companies by market capitalization recently formed about one-third of the index’s weight, the highest level since the “Nifty 50″ days five decades ago.

“All the breadth improvement we saw in November and December is basically gone at this point,” said Joe Mazzola, director of trader education, at Schwab. “We’re definitely seeing the other 490 give it up a little bit. If we continue to be in this ‘Fed isn’t going to cut’ environment, that concentration could hold firm, as people tend to pile into stocks that did better when interest rates were higher.”

Materials and real estate sector shares fell Monday, and banks and utilities also came under pressure. Semiconductors were one of the few sectors to post gains. In addition, the U.S. Dollar Index (DXY) reached its highest level in more than two months amid expectations U.S. interest rates could remain elevated.

A higher dollar can hurt emerging markets stocks, as well as multinational U.S. stocks concentrated in industries like info tech, materials, communication services and energy. The dollar has climbed along with Treasury yields, though the benchmark 10-year Treasury note yield retreated slightly early Tuesday. Analysts see 4.25% as a possible technical level to watch.

Futures based on the S&P 500® index (SPX) climbed 0.09% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.03%, and futures based on the Nasdaq-100® (NDX) rose 0.16%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) fell nearly two basis points to 4.14%.
  • The U.S. Dollar Index ($DXY) remained near two-month highs at 104.48.
  • The Cboe Volatility Index® (VIX) edged lower to 13.52.
  • WTI Crude Oil (/CL) inched up 0.7% to $73.30 per barrel.

Stocks in spotlight

Software and data analytics firm Palantir blew past analysts’ earnings projections and delivered a positive outlook, sending shares soaring ahead of the opening bell. The results brought upgrades from two Wall Street firms praising Palantir’s free cash flow guidance and AI platform.

Meanwhile, Lilly extended its impressive 2024 gains by beating analysts’ Q4 earnings and revenue expectations and providing stronger-than-expected revenue guidance for fiscal 2024. Revenue from new products grew by more than $2 billion in Q4, the first quarter to include sales of weight-loss treatment Zepbound, approved by the U.S. Food and Drug Administration (FDA) in November. Quarterly sales of diabetes drug Mounjaro also helped drive Q4 revenue.

This afternoon features earnings from Ford (F), Amgen (AMGN), Chipotle (CMG), and Snap (SNAP), with Uber (UBER) arriving early Wednesday. Walt Disney’s (DIS) results take center stage Wednesday afternoon. On Friday, PepsiCo (PEP) provides some refreshment. And those are just a few of the better-known companies on the list.

Getting back to breadth, recently, just 59% of S&P 500 stocks traded above their respective 50-day moving averages, down from above 70% a week ago. Mega caps like Meta Platforms (META) and Amazon (AMZN) soared last week following earnings. Nvidia (NVDA), which reports February 21, also continues posting new all-time highs.

Stocks on the move early Tuesday include:

  • Shares of materials firm DuPont de Nemours (DD) rose 1% in premarket trading after basically meeting Wall Street’s earnings and revenue estimates. The share gains came despite DuPont’s Q1 and full-year 2024 guidance coming in far below the average analyst estimate. DuPont warned back on January 24 that Q1 could face struggles due in part to weak demand from China. Also, DuPont noted that many customers are destocking its products rather than ordering new ones.
  • Spotify (SPOT) shares rose 5% in premarket trading after the music-streaming company reported 602 million active users in Q4, slightly above expectations on Wall Street. Premium subscribership also grew more than analysts had been thinking.
  • Shares of UBS Group (UBS) fell 4% despite the multinational investment bank reporting earnings that edged above Wall Street’s expectations. Analysts had expected a wider loss as the group continues to integrate Credit Suisse, which it acquired last year in an emergency rescue.

What to watch

Data docket: There’s no major U.S. data today, and even when reports filter in later this week they’re not expected to be too market moving. Next week is more significant, featuring consumer and producer prices along with retail sales.

Monday’s standout was the Institute for Supply Management’s Services PMI®. It came in higher than expected at 53.4% for January, the 13th consecutive month the reading showed expansion in the services sector. The Prices Paid component saw its sharpest rise since August 2012, raising inflation concerns. Also Monday, the S&P Global U.S. Services PMI® for January rose to 52.5, a seven-month high. The data appeared to weigh on Treasuries, with a corresponding rise in yields.

Yield sign: Though rising Treasury yields hurt stocks Monday, the negative correlation between yields and stocks (in which stocks fall as yields rise and rise when yields fall) appears to have faded.

“Bond yields and stock prices aren’t moving as strongly in opposite directions,” note Liz Ann Sonders, Schwab’s chief investment strategist, and Kevin Gordon, senior investment strategist at Schwab, in their latest post. “Notably, that suggests that yield moves driven by stronger economic growth and not accelerating inflation is typically cheered by stocks. Importantly, though, it also means that if the relationship between yields and stocks flips back to positive, a decline in bond yields could signal more economic weakness, thus weighing down on risk assets.”

Fed speakers are out and about this week in a big way and could help set the tone. So could a 3-year Treasury auction scheduled later today. Demand for U.S. debt helps determine Treasury yields.

Internal affairs: While New York Stock Exchange (NYSE) volume was lower than normal yesterday, implying less conviction, decliners led advances on the NYSE by a nearly five-to-one margin and new 52-week lows outpaced new 52-week highs by a score of 82 to 75. It was a rocky start after four consecutive higher weeks for the SPX.

External affairs: Shares of stocks in Hong Kong and China rallied earlier Tuesday on media reports that the country’s sovereign wealth fund said it had increased its holdings of exchange-traded funds (ETFs) on China’s stock markets. This appears to be part of Beijing’s effort to step in and support its ailing stock market.

Trading at peak: Major indexes set numerous records early this year, raising questions of how to consider trading and investing when the stock market is at or near all-time highs. This handy Schwab video helps answer questions many might have at such times, like whether it’s too late to enter or should you wait for a pullback.

Eye on the Fed

Early today, futures trading pegged chances at 16.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 64% chance the funds rate will be lower than now after the Fed’s May meeting, down from 85% a week ago.

CHART OF THE DAY:  RICHOCHETING CRUDE. If it feels like WTI crude (/CL—candlesticks) moves a lot but never really goes anywhere, here’s proof. Over the last three months, the front-month /CL contract has generally boomeranged between the 200-day moving average (purple line) and long-term support at $70 per barrel (red line), which corresponds with the price the U.S. government says it looks for to buy more oil for its Strategic Petroleum Reserve. Last week’s decline took crude below the 50-day moving average (blue line) for the first time since mid-January, which could be bearish technically. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Caution signs: Overall S&P 500 EPS growth is generally running above where Wall Street expected it just before reporting season began. Not that you’d necessarily know it from listening to the average earnings call or following guidance from many companies. Recent U.S. economic data looks resilient, but many companies are talking about battening down the hatches or are already doing so, with layoff announcements mounting. The caution isn’t just from companies dealing with crises, like Boeing (BA). Several semiconductor firms including Texas Instruments (TXN), Advanced Micro Devices (AMD), and Intel (INTC) delivered softer-than-expected outlooks. And yesterday, McDonald’s (MCD), also expressed caution despite a quarter that mostly surpassed Wall Street’s expectations. Companies continue to deal with inflation on two fronts: Customers face prices that remain high compared to pre-pandemic levels, and at the same time companies face margin pressure as wages rise. McDonald’s is a good example, Barron’s noted, as it faces a higher minimum wage taking effect for fast-food workers in California in April even as higher restaurant prices hurt low-income people who might normally visit the chain.

GDP tracker: The last two quarters saw U.S. Gross Domestic Product (GDP) grow much faster than initially expected. The resiliency continues one month into Q1. Using data out so far, the Atlanta Fed’s GDP Now forecast pencils in a 4.2% seasonally adjusted annual GDP growth rate this quarter, up from the first government estimate of 3.3% for Q4 and from the tool’s late-January Q1 estimate of 3%. Strength in construction spending and a better-than-expected ISM Manufacturing PMI® helped buttress the tool’s GDP view, as did personal consumption expenditures growth. The next update comes tomorrow after another set of resilient data.

Beyond headlines: It’s easy to get lost in which companies “beat” and which companies “missed” Wall Street’s earnings estimates. Stocks often react quickly, and investors might be prone to act out of emotion as they see the green and red numbers on their screens. At such times, it’s important to step back and check what executives say on their calls and in post-earnings media interviews. Though executives aren’t neutral, they often give a decent picture of the challenges. The key word is “guidance.” When the companies discuss their near future, you often get more color on the landscape. In the call from AMD last week, for instance, executives made clear they see 2024 strength in the data center and client segments, though the gaming and embedded segments face challenges. Then it’s up to the investor to do the homework and understand how that dichotomy might affect overall performance.

Calendar

February 7: December Consumer Credit and expected earnings from Uber (UBER), Alibaba (BABA), CVS Health (CVS), Bunge (BG), and Yum Brands (YUM).

February 8: Expected earnings from Baxter (BAX), ConocoPhillips (COP), Philip Morris (PM), Ralph Lauren (RL), Zimmer Biomet (ZBH), and Under Armour (UAA).

February 9: Expected earnings from PepsiCo (PEP).

February 12: No major earnings or data expected.

February 13: January CPI and Core CPI and expected earnings from Biogen (BIIB), Coca-Cola (KO), Hasbro (HAS), Airbnb (ABNB), and Lyft (LYFT).

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Print

Key Takeaways

  • Better-than-expected results from Palantir, Eli Lilly, Spotify send shares up early

  • Four Fed speakers and a Treasury auction on today’s schedule, raising yield worries

  • Data calendar still light, putting more focus on geopolitics and Fed policy

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