The 5,000 Challenge: SPX Near Milestone as PepsiCo Falls on Earnings, Investors Welcome Revised Inflation Data

The SPX is again on the verge of topping 5,000 after trading above it briefly intraday Thursday. Data is light today but heavy next week as investors await January inflation data. PepsiCo, Pinterest, and Expedia all are down following earnings.

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Key Takeaways

  • SPX on cusp of 5,000 again after touching milestone level in Thursday’s session

  • PepsiCo shares fall after revenue comes up short of Wall Street’s expectations

  • Market breadth remains thin as investors prep for major data week including CPI

(Friday market open) After briefly topping 5,000 intraday yesterday, the S&P 500 index® (SPX) remains on pace for its fifth straight positive week but faces a test in coming days from a host of U.S. data, including next Tuesday’s January Consumer Price Index (CPI) report.

CPI came into focus this morning when the U.S. Labor Department released revisions to December’s CPI, saying price growth was slower than it initially reported. December’s headline inflation rate was revised down from 0.3% to 0.2%, though the core reading stripping out food and energy was unchanged. Annualized change for Q4 core CPI was the same as previous at 3.3%.

The changes are part of the Bureau of Labor Services (BLS) annual revisions and had been expected. The revised numbers got an upbeat initial response from the stock market just before Friday’s opening bell, and Treasury yields eased slightly after the news.

“The revisions were relatively minimal, and the revised annualized inflation rate at the end of 2023 was unchanged from the initial estimate, suggesting the disinflationary trend should continue,” said Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.

Returning to the topic of the day, 5,000 is just a number not that different from 4,999, but it remains a talking point as the weekend approaches. Wall Street is on the cusp of this historic milestone despite the Federal Reserve’s steep rate hikes since March 2022 and got here thanks in part to slowing inflation, strong Q4 earnings, and robust U.S. economic data. Major U.S. indexes climbed in overnight trading behind mega cap strength, but Treasury yields remain near recent highs, which could potentially put the brake on stocks.

Fresh data remain sparse in what’s essentially a numbers doldrum that extends through Monday. CPI before Tuesday’s open provides the wake-up call (see more below). The CPI data, followed by January Producer Prices (PPI) later next week, could help the Fed and investors better determine if inflation continues to track lower in line with the central bank’s expectations.

Checking yesterday’s performance, the Philadelphia Semiconductor Index (SOX) gained 1.6% on strong earnings from Arm Holdings (ARM), while energy shares rose as WTI Crude Oil (/CL) futures surged 3.6% on Middle East tensions.

Futures based on the SPX rose 0.15% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) climbed 0.08 %, and futures based on the Nasdaq-100® (NDX) gained 0.26%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) fell three basis points to 4.14%.
  • The U.S. Dollar Index ($DXY) steadied at 104.11.
  • The Cboe Volatility Index® (VIX) is roughly flat at 12.83.
  • WTI Crude Oil (/CL) fell slightly to $76.08 per barrel but remains near its February highs.

Stocks in spotlight

Out of breadth: Though several mega caps lost ground yesterday, the market’s breadth remains challenged, meaning this rally isn’t lifting all boats. Just over 62% of S&P 500 stocks traded above their 50-day moving average as of late Thursday, and less than 45% of Russell 2000® index (RUT) small-cap stocks could say the same.

The S&P Equal Weight Index (SPXEW)—which weighs all stocks in the S&P 500 the same rather than by market capitalization—is up 1.4% this month versus a nearly 4% rise for the tech-heavy NDX. That’s a clear sign that mega-cap tech and communication services stocks are increasingly diverging from the rest of the market.

In a healthy market, a much broader slice of the market would likely be enjoying gains from a rally, which was the case late last year as Treasury yields fell.

“Narrow breadth, all else equal, is not a great backdrop” for stocks, said Liz Ann Sonders, chief investment strategist at Schwab. “However, markets can remain narrow with concentrated leadership for extended periods. It’s akin to overly optimistic sentiment, which is also not ideal but can stay that way for extended periods.”

Pre-game refreshment: Results today from PepsiCo (PEP) and next week from Coca-Cola (KO) can be a good barometer of consumer health. Though some companies catering mainly to lower-income U.S. consumers sounded cautious earlier this week about demand, soft drink companies enjoy a wider audience than fast food outlets or dollar stores. They’re on the menu at many pricy events like concerts and athletic contests (including a certain game this Sunday).

Despite Q4 earnings per share exceeding Wall Street’s thinking, PepsiCo shares dripped lower in premarket trading, stung by revenue growth that fell short of analysts’ expectations. The company expects 4% organic revenue growth in 2024, and also announced a 7% dividend increase. The 4% anticipated organic revenue growth seen for 2024 is below the company’s previous forecast, which was on the high end of 4% to 6% (as a reminder, for PEP, organic growth excludes divestitures, acquisitions, and foreign exchange).

PepsiCo executives voiced caution about demand metrics, saying, “Consumers are likely to remain watchful with their budgets and choiceful with their purchases.”

Stocks on the move early Friday include:

  • Pinterest (PINS) plunged nearly 9% in premarket trading following the company’s earnings report, which surpassed analysts’ EPS expectations but fell shy on revenue. Monthly active users rose 11%, but guidance was on the low side of Wall Street’s thinking. The stock rebounded from even steeper premarket losses after the image sharing and social media platform announced a new ad deal with Alphabet’s (GOOGL) Google.
  • Motorola Solutions (MSI) fell nearly 4% despite the company’s earnings and revenue beating Wall Street’s expectations and guidance coming in above consensus views.
  • Expedia (EXPE) tumbled 16% in premarket trading following mixed earnings results and news that a new CEO will take over in May. Gross bookings for the travel company came up light versus Wall Street’s forecasts and the market also appeared unimpressed by the company’s revenue growth outlook, which could slow due to falling air fares.

What to watch

Data resurfaces next Tuesday with the arrival of January’s U.S. CPI, and early expectations hint at marginal progress on that front. The Fed will likely examine the data closely for more signs of price growth continuing to slow. Analysts expect monthly core CPI of 0.3%, the same as December’s report showed. They also expect a slight improvement to 0.2% for headline CPI from 0.3% in December, according to Trading Economics. Core CPI strips out volatile food and energy prices.

Year-over-year core CPI in December was 3.9%, so analysts will be looking for any improvement there as well. This handy Schwab video explains how to track inflation using CPI and other indexes.

U.S. January retail sales pull up to the cash register next Thursday morning and early expectations are for weakness thanks in part to the fierce cold that settled over much of the country during mid-January.

Next week is a “big week for data,” Schwab’s Sonders noted. Other U.S. reports under scrutiny will include building permits, housing starts, consumer sentiment, and industrial production, with PPI also in the mix.

At the same time, next week is quiet for China, where markets close for the Lunar New Year holiday.

Crude oil could remain a focus point in coming days after the front-month WTI contract hit a new February high above $76 per barrel yesterday. Middle East tensions and falling U.S. gasoline stockpiles played into the crude rally. Rising crude prices can weigh on many sectors, especially transport companies like trucking firms and airlines. The transport sector is often seen as a helpful barometer of the overall economy, and the Dow Jones Transportation Average® ($DJT) recently approached six-month highs.

Eye on the Fed

Early today, futures trading pegged chances at 15.5% 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 58% chance the funds rate will be lower than now after the Fed’s May meeting.

“We expect three to four rate cuts this year, with the first occurring in May,” said Cooper Howard, a director of fixed income strategy at Schwab. “March seems like a very low probability for the first rate cut.”

Rates and outlook: Now that the Fed has simultaneously dropped its tightening bias and pushed back on the start of rate cuts, how could the market react? Check the latest monthly Market Snapshot video from Schwab Chief Investment Strategist Liz Ann Sonders for thoughts.

CHART OF THE DAY: COMPLACENCY? This four-year chart of the Cboe Volatility Index (VIX-candlesticks) demonstrates how it currently hovers near four-year lows and hasn’t traded above its 200-day moving average (blue line) since early November. This could mean the market is discounting downside risk, though VIX futures contracts dated as soon as this spring price in volatility creeping back toward the 200-day. Data source: Cboe. 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

Different strokes: Though investors often talk about mega caps in terms of one solid block, they’re trading on different tracks early this year. In this case, we’re referring to what some call the “New Magnificent Seven,” which drops Tesla (TSLA) for Eli Lilly (LLY) and includes the rest of the gang everyone’s come to know. In terms of 2024 performance, there’s a front pack, a middle pack, and two trailers. Nvidia (NVDA), Meta Platforms (META), and Lilly were up 42%, 32% and 27% respectively through midday Thursday to form the vanguard. Amazon (AMZN) and Microsoft (MSFT) were “only” up 12% and 10%, while stragglers Alphabet (GOOGL) and Apple (AAPL) were up 4.5% and down 2%, respectively. “Not all mega caps are the same or are performing the same,” said Joe Mazzola, director, trading and education at Schwab. Looking at the leaders, it appears trends including AI and obesity drugs have captured investors’ imaginations for now, while the cloud and smart phones take a back seat.

VIX and that: Though volatility remains relatively low for the SPX over the last two months, it might heat up in coming days ahead of next week’s critical U.S. inflation data. The Cboe Volatility Index has been hanging out in the 12–13 range, not far off above four-year lows, and aside from a spike or two here and there, has generally pointed toward small moves in the index. Just a couple months ago, it was above 20. While the VIX can quickly change if there’s a major economic or political event, there’s no rule that it needs to pop anytime soon. In fact, one argument for the VIX staying relatively low is the fact that we’re through the bulk of earnings, and getting those numbers removes some uncertainty. Seasonality, however, can’t be ruled out. The VIX has rallied each of the last four years during late February and early March. Perhaps in line with that, VIX futures trade in contango, with outer months higher than the spot price. The April contract recently traded above 15, versus below 13 for spot VIX early Thursday.

Taking the trophy: Mexico’s ascendance as the top source of U.S. imports for the first time in 20 years following two decades of China’s dominance highlights company efforts to bring manufacturing back to North America along with the uneasy U.S./China relationship. In case you missed it, Mexico’s exports to the United States in 2023 were $475.6 billion while Chinese exports dropped to $427.6 billion. However, as The New York Times reported, it’s hard to track exact amounts because some products manufactured outside China use raw materials sourced in China. Studies cited by the news outlet showed drops in imports of Chinese goods affected by U.S. tariffs. Though China was previously the top single source of U.S. imports, the combination of Canada and Mexico has long outpaced China, and the recent move toward “reshoring” could give North American manufacturers another leg up. If more products are produced on this continent, could that help companies cut shipping costs and pass savings on to consumers? It’s questionable. “In the U.S., the cost to ship goods makes up about 1% of costs,” said Jeffrey Kleintop, chief global investment strategist at Schwab. “So seaborne freight makes up about 1% of the cost of producing a good. So, it would take a big move to turn around the trajectory on overall inflation from just that.” Hear more of Kleintop’s thoughts on China and other geopolitical issues in this Schwab WashingtonWISE podcast.

Calendar

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).

February 14: Expected earnings from Occidental Petroleum (OXY), Kraft Heinz (KHC), and Cisco (CSCO).

February 15: January Retail Sales, January Capacity Utilization, January Industrial Production and expected earnings from Deere (DE) and Roku (ROKU).

February 16: January Housing Starts, January Building Permits, January PPI and Core PPI, University of Michigan February Preliminary Consumer Sentiment.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

Print

Key Takeaways

  • SPX on cusp of 5,000 again after touching milestone level in Thursday’s session

  • PepsiCo shares fall after revenue comes up short of Wall Street’s expectations

  • Market breadth remains thin as investors prep for major data week including CPI

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