S&P 500 Breaks Below 5,200 as Big Tech Sells Off: Markets Wrap

(Bloomberg) — A rout in the world’s largest technology companies dragged down stocks, with the market trimming a monthly rally that was fueled by hopes that an inflation cooldown would lead to Federal Reserve rate cuts.

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The S&P 500’s most-influential group came under pressure this week after results from some prominent names like Dell Technologies Inc. and Salesforce Inc. failed to impress investors. All megacaps were down on Friday, with the tech-heavy Nasdaq 100 dropping almost 2%.

“Leaders to losers… for now,” said Dan Wantrobski at Janney Montgomery Scott. “We are seeing breaks of initial support in some leadership areas. Net-net we are still expecting a bumpy ride for US equities as we enter the month of June.”

Menatime, Treasuries headed toward their best month in 2024 as the core personal consumption expenditures price gauge came in line with estimates, while posting the smallest gain this year. What’s more, spending unexpectedly dropped. For a data-dependent Fed, the report was seen by traders as “not quite as bad”, “slightly constructive” and “marginally dovish.”

“While we don’t necessarily want to see a weakening consumer, softening retail spending should help stoke the flames for lower rates in the second half of 2024,” said Bret Kenwell at eToro. “We’re not there yet, but the inflation reports were a constructive first step.”

The S&P 500 hovered near 5,200. US 10-year yields fell four basis points to 4.51%. The dollar fluctuated.

Investors betting that technology behemoths will continue to fuel the rally in equities could be in for a rough ride when other sectors start to catch up, according to strategists at Bank of America Corp.

The outperformance of value over growth stocks as market breadth improves could be the next “pain trade” for investors, strategists including Michael Hartnett and Elyas Galou wrote in a note.

Other potential sore points on the horizon include a drop in US equities and a widening in investment-grade bond spreads, Galou said by email.

The six biggest US companies now command a greater share of the S&P 500 than ever before.

Microsoft Corp., Apple Inc., Nvidia Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. account for 30% of the benchmark, up from about 26% at the start of the year, according to data compiled by Bloomberg. The S&P 500 is weighted by stocks’ market capitalizations.

The so-called core PCE, which strips out the volatile food and energy components, increased 0.2% from the prior month. Inflation-adjusted consumer spending unexpectedly fell 0.1%, dragged down by a decrease in outlays for goods and softer services spending. Wage growth, the primary fuel for demand, moderated.

“Markets see inflation on a slow, but steady path lower,” said Quincy Krosby at LPL Financial. “The question is still how much more the Fed needs in terms of slower inflation before initiating an easing cycle.”

To Chris Larkin at E*Trade from Morgan Stanley, investors will have to remain patient.

“The Fed has suggested it will take more than one month of favorable data to confirm inflation is reliably moving lower again, so there’s still no reason to think a first rate cut will come any earlier than September,” he noted.

Overnight index swap contracts tied to upcoming Fed policy meetings continue to fully price in a quarter-point rate cut in December, with the odds of a move as soon as September edging up to around 50%. For all of 2024, the contracts imply a total of 34 basis points of rate reductions, up slightly from the close on Thursday.

While the PCE data will likely be welcomed by the Fed, the core gauge has still risen at an annualized rate of 3.5% in the last three months, according to David Donabedian at CIBC Private Wealth.

“So, it’s way too early for any sort of victory lap for the Fed,” he noted.

In fact, inflation may not return to the US central bank’s 2% target until mid-2027, according to research from Fed Bank of Cleveland.

That’s because the inflationary impacts of pandemic-era shocks have largely resolved and the remaining forces that are keeping inflation elevated are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report Thursday.

Another aspect is that consumer spending in the first month of the new quarter slowed as real disposable incomes fell, remarked Jeff Roach at LPL Financial.

“Businesses need to prepare for an environment where consumers are not splurging like they were last year,” he noted.

“We are in a be-careful-what-you-wish-for moment because if slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets,” said

To Chris Zaccarelli at Independent Advisor Alliance, markets are in a “be-careful-what-you-wish-for moment.”

“If slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets,” he said. “However, if consumer spending – and the economy – slows too quickly then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates, so we would be careful at this point.”

Wall Street Reacts to Inflation Data:

Investors have been hoping that the bout of inflation we saw early in the year would fade, and that seems to be playing out.

The PCE data confirms price increases aren’t as sticky as feared, keeping hopes of at least one rate cut on the table.

April PCE data was a welcome relief after a string of hotter than expected inflation data in Q1, with headline and core inflation coming in as expected.

So the overall inflation outlook looks good, with disinflation in the pipeline, and that likely keeps the Fed on track to cut twice this year starting in September.

Yields fell in response to the PCE data only because there was no surprise with the data in line. Maybe too with the slightly less than expected spending figure as REAL spending was down a touch.

Overall, the April PCE report is marginally dovish. We needed to see more progress in disinflation to argue for multiple rate cuts in 2024.

Good news, right? Not quite. April inflation was better than March; still not good enough.

Inflation progress in April was not yet good enough to start the clock on the three month-type downshift we think is needed for the Fed to cut.

Corporate Highlights:

Carl Icahn has amassed a sizable position in Caesars Entertainment Inc., according to people familiar with the matter, raising the prospect of a fresh tussle with the US hotel and casino operator.
Hedge-fund manager Bill Ackman is selling a stake in Pershing Square as a prelude to a planned initial public offering of his investment firm, according to a person familiar with the matter.
Gap Inc. reported better-than-expected results and raised its outlook for the full year, showing the apparel retailer’s bid to rebuild the business is moving forward.
Penn Entertainment Inc. soared after an activist investor called for the sale of the casino company, saying a failed deal and growing pattern of guidance misses have damaged management’s credibility.
Moderna Inc. gained US approval for its RSV vaccine in older adults, giving the biotech company a second product as it seeks to move beyond its reliance on the fading Covid-19 market.
Hess Corp. shareholders approved the company’s proposal to be acquired by Chevron Corp. for $53 billion by a razor-thin majority of 51% of shares outstanding.

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