Wall Street is off to a slightly better start today but that's been the pattern all week and none of the rallies lasted through the close. Better-than-expected results from Taiwan Semiconductor appeared to help the sagging chip sector, while Netflix earnings come after the close. Weaker oil and dollar could support.
After rough day for semiconductor shares Wednesday, a rebound is underway following strong Taiwan Semiconductor results
CSX, Alaska Air exceed Wall Street’s earnings estimates, propping up transport sector
Dollar, yields, and crude ease, providing early support, but major indexes haven’t held a rally yet this week
(Thursday market open) Wall Street starts Thursday in familiar territory with major indexes attempting a rebound while crude oil, the dollar, and yields ease. It’s the same set-up as 24 hours ago, but that didn’t prevent a fourth consecutive session of losses on the third straight day where stocks rallied only to turn red by day’s end.
Several Federal Reserve speakers, leading economic indicators, Netflix (NFLX) earnings, and the evolving Middle East situation could ultimately help determine if today’s early rally lasts. Yesterday’s fizzled thanks mainly to a sell-off in semiconductor stocks that dragged the entire tech sector down following disappointing earnings results from semiconductor chip equipment maker ASML Holding NV (ASML).
Today’s chip earnings news was better right from the start thanks to Taiwan Semiconductor Manufacturing (TSM) beating analysts’ estimates and guiding for revenue above Wall Street’s expectations. Despite those upbeat earnings, shares of TSM fell early Thursday, but shares of Nvidia (NVDA) and Advanced Micro Devices (AMD) bounced back ahead of the open.
Taking a broader view, the S&P 500® index (SPX) and the Nasdaq-100® (NDX) are still just 4.4% below the March peaks, and it’s normal to experience several 3% to 5% declines in a typical year. Recent intraday rally attempts met selling, and the “buy the dip” sentiment of recent weeks seems to be fading. Mega-cap techs stumbled yesterday and the chip sector lagged, evidence that some of the tech-led excitement from last quarter has waned.
With the 2-year U.S. Treasury note yield brushing against 5% Wednesday for the first time since last fall and the 10-year Treasury note yield hovering below 4.6%, caution remains front and center. Still, there’s a sense yields may be near a natural top.
“We expect the direction of yields to be lower over time and suggest adding duration at these levels,” said Cooper Howard, director, fixed income strategy at Schwab.
The latest news from the Treasury market was solid demand for yesterday’s 20-year bond auction, which helped keep the lid on yields. The results could indicate that current yields are high enough to attract buyers.
On the rate front, markets now build in a very slim 1.6% chance that the Fed could raise rates 25 basis points at its April 30 to May 1 meeting, but chances remain 98.4% that the Fed will leave rates unchanged, according to the CME FedWatch Tool.
Futures based on the SPX were up 0.1% shortly before the close of overnight trading and futures based on the NDX inched up 0.2%. Futures based on the Dow Jones Industrial Average® ($DJI) rose 0.2%.
Crude oil came under pressure this week from soft Chinese economic data, a soaring U.S. dollar, rising U.S. inventories, and a U.S. warning that it may inject more supply from the Strategic Petroleum Reserve if necessary. Keep an eye on $80.75 for /CL, which represents the 50-day simple moving average (SMA) and a trendline the front-month contract hasn’t been below since early February. At lows earlier this morning it brushed close to the 50-day SMA, and a drop under it could accelerate losses.
The dollar, meanwhile, retreated slightly from recent five-month highs. The United States, South Korea, and Japan issued a three-way statement acknowledging concerns from Seoul and Tokyo about their currencies’ recent weakness, Reuters reported. The three agreed to “consult closely” on foreign exchange markets.
Both the yen and the South Korean won rebounded slightly following the move, which could be an attempt to “talk down” the dollar slightly. A strong dollar can pressure U.S. stocks by making U.S. products more expensive in foreign countries and hurting U.S. companies’ revenue.
Weekly Initial Jobless Claims of 212,000 showed no evidence of any slowdown in the U.S. jobs market, coming in below the 215,000 Briefing.com consensus and near historic lows. Continuing claims of 1.812 million were near expectations and again not indicative of any problems. A strong labor market is great news for U.S. workers but troubling for the Fed as it tries to keep inflation in check.
In another signal of economic vitality this morning, the April Philadelphia Fed index hit 15.5, when analysts had expected 0.0, according to Briefing.com, and the closely watched prices paid component jumped. The index, a monthly survey of business growth in the mid-Atlantic states, jumped from 3.2 in March.
Taiwan Semiconductor’s solid earnings results and guidance came on the back of surging demand for chips used in AI. The earthquake that rocked Taiwan on April 3 could have a negative impact on TSM’s Q2 gross margin, the company said today. High-performance computing revenue, which includes AI chips, rose 3% in Q1, TSM said, but smartphone revenue sank 16% year over year in what could be a negative development for TSM customer Apple (AAPL).
Netflix earnings hit screens this afternoon after the streaming company beat analysts’ estimates last time out and reported 13.12 million subscriber adds. Last quarter, Netflix warned that adds could fall from Q4. As always, Netflix is the first former “FAANG” name to report.
Sent to bed: Shares of several major companies got punished despite exceeding analysts’ earnings estimates. JPMorgan Chase (JPM) last week was Exhibit One as the market appeared to toss aside solid quarterly results to focus on what many perceived as disappointing guidance.
Meanwhile, companies missing estimates, including insurance firm Travelers (TRV) and semiconductor chip equipment maker ASML, took it on the chin yesterday. Lower net bookings than expected at ASML caused shivers in the chip sector and reminded investors that outside of AI, things aren’t necessarily firing on all cylinders for semis.
“Chip stocks’ underperformance on a disappointing early earnings report sends a warning sign for a pricey growth sector expected to drive first-quarter results, said Schwab’s Chief Global Investment Strategist Jeffrey Kleintop
This morning’s earnings from Taiwan Semiconductor offer more perspective, and we’ll get additional color on the industry next week when Intel (INTC) and Texas Instruments (TXN) report.
Stocks on the move:
Lead role: Leading Economic Index® (LEI) numbers from the Conference Board are due soon after today’s open. Housing data might keep LEI restrained considering the recent climb in mortgage rates. Other aspects of LEI like employment and manufacturing looked strong judging from recent data and may help shape the March report. Analysts expect March LEI to fall 0.1% after rising in February for the first time in two years, according to Briefing.com.
March Existing Home Sales also bow later this morning, and analysts expect a small retreat from February to an annually adjusted rate of 4.2 million, according to Briefing.com. Rising mortgage rates conceivably kept people from wanting to move as the spring breezes began. Earlier this week, March Housing Starts data came in sharply below Wall Street’s expectations, with single-family units weak across most of the country.
Numbers check: The recent slide from all-time highs pushed the SPX’s forward price-to-earnings (P/E) ratio to a less lofty but still historically high level near 20. Also, the SPX suffered its fourth-straight day of losses Wednesday and at one point tested 5,000. It hasn’t traded below 5,000 since February 21, but the last two weeks of selling means it’s basically flat over the last two months after a 10% rally to open the year. Those 10% gains are halved.
From a sector standpoint, the worst performers this year remain those with heavy interest rate exposure, including real estate, utilities, and consumer staples. But consumer discretionary is another lagging category, hurt partly by the dramatic drop in shares of mega cap Tesla (TSLA).
Wednesday in review:
ASML’s slump helped send the PHLX Semiconductor Index (SOX) down 3.3% to its lowest level since late February. Transportation shares were also under pressure after trucking company J.B. Hunt Transport Services (JBHT) dropped 8.1% in the wake of disappointing quarterly numbers. Energy shares slipped as WTI Crude Oil (/CL) futures fell 3% to a three-week low.
Early today, futures traders saw chances of a quarter-point rate cut following the Federal Open Market Committee (FOMC) meeting in June at around 19%, rising to roughly 44% for the late-July meeting, based on the CME FedWatch Tool. The tool builds in nearly 90% chances of at least one rate cut this year and close to 55% chances of two.
Talking technicals: For technical support, the area near 5,000 in the SPX that represents a 5% pullback from this year’s all-time closing high and could be a place to watch, along with the old all-time high near 4,800.
Options corner: Need help understanding the options expiration process? Here’s a quick overview, including a checklist and some basic lingo to know.
CHART OF THE DAY: CHIP SECTOR MOMENTUM FADES. For the first time since early November, the Philadelphia Semiconductor Index (SOX-candlesticks) trades below the 50-day moving average (blue line) that marked the path of the long uptrend. Data source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Earnings, jobs, and rates: The Fed’s dual mandate includes jobs as well as prices, so it may ease the rate brakes if the labor market stumbles. Earnings season can provide clues about consumer health, which in turn can tell you something about the jobs picture. “Consumers are spending but they’re also using a lot of debt to finance it … and we’ve seen delinquency rates on credit cards and auto loans turn up,” said Kathy Jones, chief fixed income strategist at Schwab, in a CNBC interview. “The concern comes in when job growth slows down. People who have jobs spend money and feel free to use debt financing for that. In general, as long as job growth is healthy, people spend, but we look for job growth to slow down later in the year.”
Beyond the numbers: While it’s not the best idea to isolate one or two companies, Q1 struggles at logistics firm J.B. Hunt Transport Services as trucking volumes fell, as well as cautious comments about inflation’s impact on luxury goods sales from the management of LVMH (LVMH), could send signals about consumer demand across a wide spectrum. As companies report, look beyond the data to glean the picture executives paint of demand and future growth. So far, investors seem heavily focused on guidance, perhaps in part because the market is at a historically high valuation and likely requires accelerating earnings growth to justify current level.
April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).
April 22: Expected earnings from Verizon (VZ) and Nucor (NUE).
April 23: March New Home Sales and expected earnings from Freeport-McMoRan (FCX), Halliburton (HAL), Lockheed Martin (LMT), Kimberly-Clark (KMB), PepsiCo (PEP), Philip Morris (PM), Tesla (TSLA), Texas Instruments (TXN), and Visa (V).
April 24: March durable goods orders, and expected earnings from Meta Platforms (META), AT&T (T), Ford (F), Boeing (BA), IBM (IBM), Humana (HUM), and Waste Management (WM).
April 25: March Pending Home Sales, first Q1 GDP estimate, and expected earnings from Bristol-Myers Squibb (BMY), Merck (MRK), Union Pacific (UNP), Dow (DOW), Alphabet (GOOGL), Microsoft (MSFT), T-Mobile (TMUS), and Valero Energy (VLO).
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