Seeking Catalysts: Stocks Down Early Ahead of Fed Speakers, 10-Year Auction While Uber, Lyft, Drive Opposite Ways

(Wednesday market open) Earnings season is winding down and fresh data remain sparse, keeping Wednesday’s focus squarely on a host of Federal Reserve speakers, a Treasury auction, and how earnings shape up now that 80% of companies have opened their books.

Stocks gave back some recent gains in featureless trading ahead of the opening bell as yields rose.

With roughly 425 S&P 500® index (SPX) companies reporting, first-quarter earnings per share (EPS) growth is near 7%. About 54% of firms beat analysts’ estimates on revenue and 80% beat on EPS.

Mostly solid results from the six “mega caps” reporting so far—Nvidia (NVDA) looms—helped propel the recent rally. However, the SPX forward price-to-earnings (P/E) ratio is historically lofty near 20, and rally hopes ahead could partly depend on earnings results from the other 493 SPX firms as 2024 continues (see more below).

Three Fed speakers opine today following hawkish remarks yesterday from Minneapolis Fed President Neel Kashkari, who said he couldn’t rule out a rate hike and expects rates to stay where they are for an “extended period,” according to media reports.

A 10-year Treasury auction might grab attention following solid results from a 3-year auction. Uber (UBER) and Lyft (LYFT) drove opposite ways after their earnings, and U.S. mortgage applications rose 2.6% last week, according to the Mortgage Bankers Association, reversing recent steep declines as the average rate dipped. Later this morning, stay tuned for March Wholesale Inventories.

Futures based on the SPX fell 0.37% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) slipped 0.5%. Futures based on the Dow Jones Industrial Average® ($DJI) dropped 0.17%, putting a five-day winning streak in jeopardy.

Morning rush

• The 10-year U.S. Treasury yield (TNX) climbed two basis points to 4.48%.
• The U.S. Dollar Index ($DXY) inched up to 105.59 and seems to have found technical support after last week’s drop below 105.
• The Cboe Volatility Index® (VIX) rose slightly to 13.45 but remains near six-week lows.
• WTI Crude Oil (/CL) fell 1.3% to $77.33 per barrel, the lowest since March 11, after an industry report showed rising U.S. inventories. The official government data is later today.
• Bitcoin (BTC) dropped 1.3% to $62,245.

Crude is down 12% from its mid-April peak above $87 and below its 200-day and 50-day moving averages on the charts, a technically bearish development that could trigger more selling.

Stocks in spotlight

Earnings untangled: Analysts expect 11% full-year EPS growth, FactSet said. But to rise from that and perhaps help the SPX gain without extending its current high valuation, there likely needs to be broader earnings improvement.

The market enjoyed a November-through-March surge in multiple expansion, meaning stock prices rose sharply without a corresponding increase in forward earnings estimates. In fact, the current 11% estimate is down from where it stood in mid-2023. It will be interesting to see how updated full-year 2024 analyst estimates look after the dust settles on Q1 earnings and guidance.

“Despite a tougher performance backdrop in April, the market still looks quite expensive across a wide variety of metrics,” said Liz Ann Sonders, Schwab’s chief investment strategist, and Kevin Gordon, director, senior investment strategist. “Multiple expansion in and of itself is not a negative for near-term performance, but its key role in driving stocks higher over the past year means the bar is higher for earnings growth. Fortunately, estimates point to a solid year for profits, but we think the market will continue to put an increasing amount of emphasis on revenue growth and forward guidance.”

Catching breadth: From a market breadth perspective, about 53% of S&P 500 stocks traded above their respective 50-day simple moving averages (SMA) as of Tuesday, not far off the long-term historic average. And 74% traded above their 200-day SMAs. Both are up substantially since mid-April lows of 25% and 64%, respectively.

It’s important to keep an eye on market breadth, especially in a rally, because the heavy market capitalizations of the 10 biggest SPX stocks can sometimes make the market look stronger than it truly is. A year ago, for instance, the SPX was up more than 5% for the year but the percentage of stocks trading above their 200-day SMAs was much lower than now at 48%. That meant the rally heavily reflected strength in the largest stocks while the average stock wasn’t as strong as it is today.

Stocks on the move:

Ride-hailing giants Lyft and Uber head up this morning’s earnings class and investors are happy with one and not so pleased with the other, judging by early results in the stock market.

• Lyft: Shares climbed about 5% in premarket trading after earnings and revenue surpassed Wall Street’s average estimates. Gross bookings, a key metric, rose 21% to also beat analysts’ estimates, and rides rose 23% to 188 million. Lyft expects gross bookings of between $4 billion and $4.1 billion in the current quarter. This time, unlike last, the company’s press release didn’t confuse the market (shares initially soared three months ago after a typo in Lyft’s Q4 earnings release erroneously suggested the company expected a surprisingly large improvement in profitability).
• Uber: Shares dove 6% ahead of the open after reporting quarterly losses despite revenues being in line with Wall Street’s expectations. The FactSet consensus for EPS was $0.22, and instead Uber reported a loss of $0.32. The company said the loss partly reflected $721 million in “unrealized losses related to the revaluation of Uber’s equity investments.” Gross bookings rose 20%, short of analysts’ estimates. The company’s CEO told CNBC the quarterly loss had “nothing to do with the operating business” and that the company had to “mark down those equity stakes.” For Q2, Uber said gross bookings will be between $38.75 billion and $40.25 billion, on the low side of Wall Street’s expectations.
• Rivian Automotive (RIVN) fell 7% in premarket trading due to the company missing analysts’ average quarterly EPS estimate, though revenue came in higher than expected. The company still expects to produce 57,000 units this year, but as Barron’s points out, the company still must sell all the cars it builds, and demand for expensive EVs has been light lately.

What to watch

Do I hear $58 billion? With most of the exciting U.S. data sandwiched around this week (jobs report behind and inflation ahead) investors will take what they can get in terms of news. One item of interest was solid demand for yesterday’s $58 billion 3-year Treasury note auction. The results at 1 p.m. ET appeared to lift Treasuries and send yields (which move the opposite way) near their lows for the day.

There’s a 10-year note auction scheduled today and a 30-year bond auction Thursday, so be on the lookout for possible Treasury market impact. Relatively generous yields that hold a premium to markets outside the country keep driving demand for U.S. Treasuries.

“With yields well above those in other countries and the Fed biased toward easing, Treasuries are attracting a range of global buyers,” said Kathy Jones, chief fixed income strategist at Schwab. “Treasuries also remain a safe haven for investors that need or want to have ballast in a volatile political world.”

Roll out the barrels: Another thing to watch today is the latest weekly report on U.S. crude oil inventories. Last week’s data surprised investors with a sharp increase of more than 7 million barrels, helping send U.S. crude prices to seven-week lows.

Jobless update: This week’s Weekly Initial Jobless Claims report could drum up more interest than usual following last week’s April Nonfarm Payrolls report that showed a bit more softness than expected in key labor metrics. The report, due at 8:30 a.m. ET Thursday, is expected to show weekly claims historically low at 213,000, Briefing.com said.

Friday brings the preliminary University of Michigan May Consumer Sentiment Index, but otherwise data are thin before next week’s deluge of inflation reports.

Stockholm syndrome: Overseas, there was some buzz this morning following Sweden’s central bank’s decision to lower its key policy rate by 25 basis points. The country said inflation is approaching its target level and economic activity is weak. This follows a recent rate cut by Switzerland and comes amid growing expectations that the European Central Bank (ECB) could cut rates next month.

Tuesday in review:

Major U.S. equity indexes finished mixed Tuesday, with renewed hopes for lower interest rates and a continuing slide in Treasury yields tempered by weakness in semiconductor shares and some earnings misses. The SPX managed a modest gain to close at four-week highs.

Interest-rate-sensitive sectors including real estate, consumer staples, and utilities, were among the strongest performers Tuesday, and two of those three (utilities and staples) boast the best sector gains for the last month. Year to date, communication services, energy, and information technology are all up double-digits while real estate is the only sector in the red.

Talking technicals: “Technically we’ve healed the damage that we experienced during April,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. He noted that all the major U.S. indexes are back above their respective 50-day Simple Moving Averages and the small-cap Russell 2000® Index (RUT) is back above 2,000. However, the SPX bumped against 5,200 yesterday and couldn’t find traction.

The 50-day moving average for the SPX is at 5,134, which might be a level to watch for possible support if today’s early selling accelerates.

Eye on the Fed

Early today, futures traders place 9% chances of a 25-basis-point rate cut at the Federal Open Market Committee’s (FOMC’s) June 11–12 meeting, rising to roughly 29% for the late-July meeting, based on the CME FedWatch Tool.

Recession ends: A mild recession in Europe is over, says Jeffrey Kleintop, Schwab’s chief global investment strategist, in his latest post. He provides his take on recent data and earnings from the continent and notes that despite a recent climb, valuations for eurozone stocks remain below the longer-term average.

Thinking cap

Ideas to mull as you trade or invest

Gasoline, economy de-linked? Today’s U.S. government weekly crude supplies data comes as gasoline demand remains well below pre-pandemic levels. The multi-year U.S. decline in gasoline use comes despite solid economic and consumer spending growth that historically tended to raise gasoline demand, implying a sea change in how U.S. consumers and businesses get their energy. The trend toward working at home and the rising popularity of EVs and hybrids could play a role, along with several other factors. Lower gas demand isn’t good news for major energy firms. It could also reinforce worries about overall consumer health. That said, this isn’t the U.S. economy of 1975. Gasoline and energy consumption in general are smaller as percentages of the economy thanks to steadily rising average gas mileage since then and many other savings initiatives. So, falling gasoline use doesn’t necessarily mean the economy’s in trouble as it might have signaled back then.

GDP watch: The second quarter is nearly half over, so this is a good time to check the Atlanta Fed’s GDPNow meter to get a sense of where gross domestic product (GDP) might be heading. Based on data to date, the indicator last pegged Q2 GDP growth at 3.3%, well above the government’s 1.6% estimate for Q1. The most recent estimate was unchanged from previous, but today’s scheduled update could be worth watching as it might include last week’s April jobs, wages, and unemployment data.

Deeper dive: The Schwab Trading Activity Index ($STAX) for April showed investment exposure falling during the four-week period ending April 26. That took the STAX score down to 48.87, from 51.65 in March. It was the first slip in six months. Digging in, clients still bought during April, just not to the same extent as in previous months. They also appeared more selective and discerning in their purchases. This could have reflected a sharp rise in bond yields, delayed expectations for rate cuts, rising market volatility, and lower-than-expected GDP.

Calendar

May 9: Expected earnings from Hyatt Hotels (H) and Warner Bros. Discovery (WBD).

May 10: University of Michigan preliminary May Consumer Sentiment.

May 13: No major earnings or data expected.

May 14: April Producer Price Index (PPI) and core PPI, and expected earnings from Home Depot (HD), and Alibaba (BABA).

May 15: April Consumer Price Index (CPI) and core CPI, April Retail Sales, and expected earnings from Cisco (CSCO).