Stocks rose amid a surge in tech megacaps and a fresh batch of corporate earnings, with traders seemingly snubbing worrisome signals from the Treasury market showing the curve inversion reached its deepest levels since the 1980s.
(Bloomberg) — Stocks rose amid a surge in tech megacaps and a fresh batch of corporate earnings, with traders seemingly snubbing worrisome signals from the Treasury market showing the curve inversion reached its deepest levels since the 1980s.
The breakneck rally in growth shares this year regained momentum, with Tesla Inc. doubling from a January intraday low. Walt Disney Co. jumped on plans for a dramatic restructuring of the world’s biggest entertainment company, including 7,000 job cuts and $5.5 billion in cost savings. PepsiCo Inc.’s profit beat expectations, a sign that inflation-weary grocery shoppers are absorbing higher prices.
“We view yesterday’s market pullback as just a correction within the context of an emerging intermediate-term uptrend,” wrote Craig Johnson, chief market technician at Piper Sandler. “We also reiterate our belief that the SPX will achieve a target range of 4,200-4,300 during this “Hop” phase of our 2023 market call. No change to our SPX year-end price objective of 4,625.”
Equities rebounded even as the bond market flashed recession signals.
The US 2-year yield exceeded the 10-year yield by the widest margin since the early 1980s, surpassing its December 2022 extremes. That typically occurs when central banks are in the process of raising policy rates, a maneuver that pushes up the short-term yields while weighing on longer-term yields by damping expectations for inflation and growth. In the US, they have a track record of preceding economic downturns by 12 to 18 months.
Meantime, US retail investors turned bullish for the first time since early April, with the bull-bear spread in the American Association of Individual Investors (AAII) rising to 12.5 from -4.7 last week.
From a contrarian perspective, “we now need to pay attention and while not extreme and standing room only, the bull boat is getting filled up,” said Peter Boockvar, author of the Boock Report.
For some market watchers, trades favoring disinflation are soon set to reverse as price increases prove more entrenched than anticipated.
This year, higher-duration sectors, such as tech and consumer discretionary have led stocks’ advance, while low-duration ones such as energy and utilities have underperformed. This is a reversal of the trend from late 2021, where investors started to shun high-duration stocks as inflation began to rise rapidly.
“The stock market rally so far this year has been too much too fast and mirrors the reckless investing behavior from 2021 where investors purchased profitless companies without doing their due diligence,” said David Trainer, chief executive officer at New Constructs. “In order for the market to bottom, we need to see much more downside in meme stocks, profitless tech stocks, crypto and other reckless speculative assets. Instead, we are seeing these areas of the market rally, which shows investors haven’t learned their lesson from 2020-2021.”
As equities rebounded, Wall Street’s so-called fear gauge resumed its downward trend. Ari Wald at Oppenheimer says he expects the Cboe Volatility Index to remain stubbornly low this year — a development that historically bodes well for US shares.
He’s wagering that the VIX will remain below 20 for some time as the market has already priced for a deceleration in inflation prints this year, helping the S&P 500 to overshoot to 4,600 in the first half of 2023 as market breadth broadens and cyclical leadership turns to growth-oriented companies. The gauge closed at 4,117.86 on Wednesday.
Despite the Nasdaq 100’s latest retreat on weaker earnings and higher rates headwinds, the technical picture on the tech-heavy benchmark remains bullish after it marked a so-called double bottom at the end of last year. The index has also exited a downtrend in place during all of 2022, while its weekly relative strength index, a momentum indicator, is far from overbought levels.
“That suggests bullish turn for the Nasdaq 100,” according to Bank of America Corp. technical analyst Stephen Suttmeier.
On the economic front, applications for US unemployment benefits rose for the first time in six weeks but remained historically low, underscoring the resilience of the job market despite mounting economic uncertainty.
Key events:
- US University of Michigan consumer sentiment, Friday
- Fed’s Christopher Waller and Patrick Harker speak, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.9% as of 9:52 a.m. New York time
- The Nasdaq 100 rose 1.3%
- The Dow Jones Industrial Average rose 0.8%
- The Stoxx Europe 600 rose 0.9%
- The MSCI World index rose 0.9%
Currencies
- The Bloomberg Dollar Spot Index fell 0.6%
- The euro rose 0.7% to $1.0788
- The British pound rose 1% to $1.2189
- The Japanese yen rose 0.6% to 130.55 per dollar
Cryptocurrencies
- Bitcoin fell 0.9% to $22,753
- Ether fell 0.6% to $1,643.69
Bonds
- The yield on 10-year Treasuries declined three basis points to 3.58%
- Germany’s 10-year yield declined seven basis points to 2.29%
- Britain’s 10-year yield declined six basis points to 3.25%
Commodities
- West Texas Intermediate crude fell 1% to $77.70 a barrel
- Gold futures rose 0.2% to $1,894.50 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Namitha Jagadeesh, Michael Msika and Isabelle Lee.
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