(Thursday market open) After quarterly reports from Home Depot (NYSE:HD) and Target (NYSE:TGT) disappointed investors earlier this week, Walmart (NYSE:WMT) broke the streak today with earnings that easily beat analysts’ estimates and appeared to lift overall spirits on Wall Street. Major indexes, which rallied on debt ceiling hopes yesterday, extended their gains into Thursday’s premarket trading.
Aside from the big box results, it feels like everyone’s on pins and needles awaiting word from Washington, D.C., regarding the debt ceiling. Until Wednesday’s rally, the market had barely budged over the last month, and the S&P 500 index (SPX) hadn’t had a 1% or greater move in seven sessions. That’s the longest stretch in months, and it implies investors aren’t making big bets one way or another until they know where the dust settles on Capitol Hill.
With that in mind, did Wednesday’s surge indicate brighter times ahead? One note of caution is the session’s lighter-than-normal volume, which can indicate a lack of broad enthusiasm. On any further rallies, consider watching possible technical resistance for the SPX up near 4,170, which marked the peak of the late-April rally. The SPX hasn’t touched 4,200 since last August, so clawing back to that level might represent a significant change in the climate.
That kind of rally, or for the SPX to enter a new bull market (which would lock into place near 4,290, or 20% above last October’s low close), might require additional signs of debt ceiling progress along with softer inflation numbers late next week in April’s Personal Consumption Expenditures (PCE) prices report.
Morning rush
- The 10 Year Treasury Yield climbed 1 basis point to 3.6%, the highest since April 19.
- The US Dollar Index Futures ($DXY) rose to 103.09, the highest since March 27.
- The Cboe Volatility Index® (VIX) futures are back under 17 at 16.87.
- WTI Crude Oil (/CL) is roughly flat at $72.69 per barrel.
As Wall Street builds on yesterday’s rally, there’s generally a more “risk-on” tone this morning, judging by the rise in yields and drop in VIX.
One positive metric yesterday was in the sector arena, where sagging financials were among the strongest performers. The KBW Regional Banking index soared over 7% and banks are up again in premarket trading today. Semiconductors also climbed and oilfield services companies gained as crude oil futures surged nearly 3%.
Generally, breadth looked healthy yesterday, with nine of the 11 S&P 500 sectors rising. The only laggards were defensive areas like utilities and staples—the type of scorecard you’d normally expect to see in a cyclical rally. Advancers outpaced decliners by a large margin, but more stocks still made new 52-week lows than new 52-week highs.
Just In
Initial jobless claims fell to 242,000 last week from 264,000 the week before. This metric is still generally trending higher, but week-to-week outcomes can be volatile. The Federal Reserve is trying to cool the hot jobs market, so any rise in claims could be seen as more bullish for anyone, hoping rates eventually pause or fall.
Stocks in the Spotlight
Turnaround Thursday? WMT’s quarterly results easily beat Wall Street’s estimates on both the top and bottom lines. The retailer reported Q1 adjusted EPS $1.47, well above the consensus view of $1.32. Revenue of $152.3 billion also exceeded the consensus of $148.65 billion. Walmart’s U.S. comparable sales rose 7.4% with e-commerce up 27%, led by pickup and delivery.
“We had a strong quarter,” said Doug McMillon, president and CEO of Walmart, in the company’s press release. “Comp sales were strong globally… We leveraged expenses, expanded operating margin, and grew profit ahead of sales.”
WMT also raised fiscal 2024 guidance. Shares rose nearly 2% in premarket trading. As some analysts had expected, WMT benefitted from solid grocery sales even amid softness in more “discretionary” items like clothing and electronics. This reflects a general trend in retail where more cautious consumers are focusing on essential items—something seen in TGT’s results yesterday as well.
The company, in its earnings call, cited strong quarterly growth in its China business, perhaps a positive sign for reopening trends there.
Eye on the Fed
Chances of the Fed pausing rate hikes in June stood at 73% of this morning, according to the CME FedWatch tool. That’s down from 89% a week ago. It’s probably too early to be certain, despite what the market’s telling us. Consider all the data between now and the Fed’s June 14 decision, including PCE prices, May jobs and wage growth, and the May Consumer Price Index (CPI).
The Federal Open Market Committee (FOMC) will mull all of this and more at its meeting next month, and no one has any idea what the data will show. However, with the federal funds target range currently above the annual inflation rate, the FOMC may not feel as much pressure to raise rates further unless monthly inflation or wages spike sharply.
The speaking slate this week includes Fed Governor Philip N. Jefferson, who will appear today at an insurance forum in Washington, D.C., as well as Fed Vice Chair for Supervision Michael S. Barr, who will address the Senate Committee on Banking, Housing, and Urban Affairs, also today.
On Friday at 11 a.m. ET, Fed Chair Jerome Powell and former Fed Chair Ben Bernanke will appear together at a Washington, D.C., research conference.
What to Watch
Despite the optimism that fueled yesterday’s rally, the finish line on avoiding U.S. default remains some ways off and could continue cap rallies, as it has over the last month. The Nasdaq 100® (NDX) hit nine-month highs Wednesday, but it was amid slightly lower-than-normal volume for both the NDX and Wall Street in general.
Shortly after today’s open, investors get a look at April existing home sales, with consensus at a seasonally adjusted 4.3 million, according to Briefing.com.
That would be down from 4.44 million in March, when sales were off 22% from the same month a year earlier. Existing home supplies remained tight that month as higher mortgage rates generally discouraged homeowners from selling. Mortgage rates have remained high, with the average 30-year rate still above 7%, according to Forbes.
April housing starts and building permits were a mixed bag Wednesday, as starts unexpectedly rose but permits came in beneath Wall Street’s expectations.
Pause playbook? What happens to the stock market historically when the Fed pauses a rate hike cycle? There’s been an extraordinary range of outcomes since the S&P 500’s inception in 1928, says Schwab chief investment strategist Liz Ann Sonders.
CHART OF THE DAY: GREEN SHOOTS. The dollar index ($DXY—candlesticks) recent revival correlates with recent slowing losses in regional banks (KRE—purple line). Data source: S&P Dow Jones Indices. 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
Consumer clipped: As retail earnings pour in and executives cite shopper “caution,” consider why this may continue even if inflation eases and unemployment stays low. The high-interest-rate environment can affect what’s sold at big stores like Walmart (WMT) and Target (TGT), even for purchases that don’t require loans. High interest rates on car, home or credit card loans can crowd a shopper’s budget, narrowing their ability to buy additional items. Many people now pay $700 a month or more to finance their cars, according to research from Cox Automotive. This might explain why they’re not opening their wallets at big-box stores to buy jewelry or electronics. They’re still shopping at major retailers, judging from traffic volume at the stores, but more often for food and other essentials rather than so-called “discretionary” items. Discretionary spending isn’t limited to your local big box. A new car can also be discretionary—unless the old one truly reaches “jalopy” status. U.S. auto sales hit 11-year lows in 2022, which suggests more people were putting off auto purchases—though Cox notes a solid year-over-year sales improvement in Q1 of 2023.
Sunny forecast questioned: The big story this earnings season is how S&P 500 companies on average easily surpassed the average analyst earnings per share (EPS) estimate. To date, both EPS and revenue beats are far better than in the previous four quarters, according to Randy Frederick, managing director of Trading & Derivatives at the Schwab Center for Financial Research. Does this mean we can expect a similar level of “earnings beats” in coming quarters, perhaps implying that there’s room for earnings-fueled growth in the S&P 500® index (SPX)? Not necessarily. The bar may have been set too low for Q1 earnings, but the “bar is likely set too high for earnings in 2H,” says Schwab’s chief investment strategist Liz Ann Sonders.
In the green: Recent price patterns in the U.S. dollar index ($DXY) roughly correlate with the perceived health of the banking industry. The dollar index slid from its 2023 high above 105 right around the time two banks failed in early March. It treaded water near 101 for weeks after that, losing more ground early this month when First Republic Bank (OTC:FRCB) went down. Since then, regional bank stocks arrested their descent (at least for the moment) and the dollar revived to its highest level since late March. It’s important not to confuse correlation with causation; there are other reasons why the dollar firmed, including the Fed’s recent rate hike and Fed speakers’ continued hawkish tone. Still, receding worries about a financial crisis might be buffering the dollar index. By comparison, the $DXY stayed mainly below 90 and dropped as low as 70 during the 2008–2009 Great Recession, when many banks failed. A stronger dollar generally signals investor enthusiasm about the U.S. economy, and that can help keep inflation at bay.
Calendar
May 19: Expected earnings from Deere (NYSE:DE) and Foot Locker (NYSE:FL).
May 22: No major earnings or data expected.
May 23: April New Home Sales and expected earnings from AutoZone (NYSE:AZO), and Dick’s Sporting Goods (DKS).
May 24: No major earnings or data expected.
May 25: Q1 GDP second estimate, April Pending Home Sales, and expected earnings from Dollar Tree (NASDAQ:DLTR) and Best Buy (BBY).
Happy trading,
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