Key Takeaways

S&P 500 index approaches all-time highs on another lift from semiconductors

Stocks are on the rise despite climbing Treasury yields as rate cut odds get pushed back

Existing home sales, consumer sentiment data on way soon after today’s open

(Friday market open) Wall Street starts Friday knocking on the door of a new record high, and if it gets there, credit likely belongs to the suddenly sizzling tech sector—semiconductors in particular.

The chip sector broke out to all-time highs this week after a robust demand forecast from Taiwan Semiconductor (TSM). Nvidia (NVDA) climbed another 1.5% early Friday after Meta Platforms (META) CEO Mark Zuckerberg indicated Thursday that the company is spending billions on Nvidia’s semiconductors to power the company’s artificial intelligence ambitions.

Despite that, the major indexes spent most of this week stuck in the same tight trading range they’ve been in all month, with the record closing high of 4,796 for the S&P 500® index (SPX) still not eclipsed.

“Perhaps continued money flow into technology can rise the tide enough to lift the SPX past resistance,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. The all-time record intraday high for the SPX is 4,818, set two years ago.

If a record gets set today, it will be despite a less favorable Treasury market. Yields continue to climb as investors increasingly discount odds of a Federal Reserve rate cut in March. The probability of that fell below 54% this morning, CME futures pricing indicated, down from 77% a week ago as firm U.S. economic data and hawkish Fed speaker comments helped roll back hopes of a Q1 Fed move.

The 10-year Treasury note yield trades near 4.14% this morning at a five-week high, but for the first time in a while the stock market seems to be temporarily divorcing itself from Treasuries. That said, most of the gains are concentrated in the very largest tech and communication services stocks.

Yesterday’s nearly 1% tech-led rally put the SPX back within a stone’s throw of the peak reached in early 2022. Several mega-cap tech names recently notched fresh 52-week or all-time highs, including Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Netflix (NFLX).

Technology stocks climbed more than 2% Thursday to top the sector scorecard. Communication services and industrials rose more than 1% while “defensive” areas like utilities, real estate, small caps, and staples continued to lag.

Once again, the so-called “Magnificent Seven” and their retinue seem to be generating the most investor enthusiasm while other sectors lose steam following a broader rally to close out 2023. Rising Treasury yields and an uncertain geopolitical environment could be reasons. Last spring, during a period of U.S. financial uncertainty, investors gravitated toward the biggest stocks on the market, as well, drawn in part by their thick balance sheets.

Futures based on the SPX rose 0.5% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) were up 0.6% and Nasdaq-100® (NDX) futures climbed 0.8%.

Morning rush

The 10-year U.S. Treasury Yield (TNX) rose two basis points to 4.14%.The U.S. Dollar Index ($DXY) is steady at 103.35.The Cboe Volatility Index® (VIX) fell to 13.64.WTI Crude Oil (/CL) dropped 0.4% to $73.80 but the market remains on alert as Red Sea tensions continue.

What to watch

Fed speakers so far this week have been almost uniformly hawkish, pushing back on expectations of a near-term rate cut. San Francisco Fed President Mary Daly is scheduled to deliver remarks today after saying a month ago that rate cuts may be needed this year to prevent overtightening, according to The Wall Street Journal.

Chicago Fed President Austan Goolsbee, speaking on CNBC this morning, said the Fed continues to make progress on inflation but still sees stickiness in housing prices.

December Existing Home Sales bow soon after the open. They’re expected to be about flat versus November at a seasonally adjusted annual rate of 3.82 million, according to Trading Economics. This comes after they rose in November for the first time in eight months, evidence that perhaps slightly lower mortgage rates are shaking loose some supply that was locked tight previously.

Existing home sales are the largest portion of overall home sales. However, they’re a slightly less timely read on home purchase demand compared to new home sales because existing home sales are based on contract closings and new home sales are based on contract signings. 

Investors also soon get a read on the mood of U.S. consumers heading into 2024 with Preliminary January Consumer Sentiment from the University of Michigan. The headline figure of 68.8 is expected to be down slightly from December’s 69.7, Briefing.com said. December’s surprise was a drop in year-ahead inflation expectations to 3.1% from 4.5% in November. This was likely driven in part by falling gas prices, which have remained relatively low in the new year. Inflation expectations are a key element and could get a close look from the Fed as it tries to keep inflation fears in check.

Stocks in spotlight

Friday’s earnings schedule includes major oilfield services provider Schlumberger N.V. (SLB), whose shares, like others in the energy sectors, have been under pressure in recent months as oil prices fell. Schlumberger shares are down nearly 15% over the past 12 months. Shares rose 1% in premarket trading after the company beat Wall Street’s earnings estimates and raised its dividend.

J.B. Hunt Transport Services (JBHT) earnings arrived at the loading dock a bit light, missing analysts’ average earnings per share (EPS) estimate. Revenues also fell 9.6% year over year amid weak freight volumes, but slightly beat Wall Street’s forecast. Shares rose in premarket trading. The transport sector is often seen as a barometer for consumer demand, but post-pandemic sales growth of goods delivered by truck and train withered as consumers instead embraced experiences like travel and concert tickets.

Stocks on the move early Friday include:

Travelers (TRV) increased 4.5% after the company easily beat Wall Street’s quarterly earnings per share (EPS) and revenue estimates and saw costs fall.Roku (ROKU) climbed 1.5% after getting an upgrade from Seaport Research.Texas Instruments (TXN) climbed 2.2% ahead of earnings next week after receiving an upgrade from UBS.Spirit Airlines (SAVE) rose 31% after the airline said it sees Q4 revenues at the high end of initial guidance and that the merger with JetBlue (JBLU) “remains in full force and effect.” A judge’s ruling blocked the merger earlier this week, sending Spirit shares tumbling.

Eye on the Fed

Early today, futures trading pegged chances at 97.4% for the Federal Open Market Committee (FOMC) holding rates steady following its January 30–31 meeting, according to the CME FedWatch Tool. The market prices in a 53.8% chance the funds rate will be a quarter-point lower than now after the Fed’s March meeting.

Over the last 22 months, Wall Street has learned to live with rising interest rates. Judging from Thursday’s recovery after rate-driven selling the day before, investors may be starting to accept the idea of rates that stay “high for longer” (not “higher for longer” as few expect more hikes). Atlanta Fed President Raphael Bostic said Thursday he doesn’t expect a rate cut until Q3, and major indexes climbed. (See more below).

Talking technicals: Trading remains range-bound in the SPX so far in 2024 following a strong rally to close out 2023. Specifically, the SPX has roughly been confined to a 4,700–4,800 trading range and has stalled multiple times as it approaches prior all-time highs around 4,800 (4,796 on a closing basis, 4,818 on an intraday basis). “The price action suggests a lack of conviction from the bulls to propel the index to new heights, at least for now,” said Schwab’s Peterson. “The market may need a catalyst to move solidly above this area of resistance, and Q4 earnings results could potentially provide that boost.”

Bank loans 101: If interest rates fall this year, bank loan income may decline. That’s not necessarily a reason for investors to avoid bank loans, which generally offer higher yields than many other fixed income investments. But it is important to understand the implications, like greater risk. Read more about these investments in the latest post by Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.

CHART OF THE DAY: SIMILARITIES END. Both the PHLX Semiconductor Index (SOX-candlesticks) and the small-cap Russell 2000 index (RUT-purple line) rallied sharply most of late 2023, peaked in late December, and stumbled to start 2024. But they’ve gone separate ways since. Semiconductors spearheaded this week’s market gains while small caps continue to sag. Data sources: Nasdaq, FTSE Russell. 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

High for longer: If the Fed’s Bostic is right about no rate cuts until Q3, that would imply the Fed’s target range staying at current levels of between 5.25% and 5.5% for around a year since reaching that two-decade high last July. This seems lofty compared with the 15 years before COVID-19, but it’s far from unusual historically. Though rates at these levels can hurt corporate margins and put a brake on big purchases by consumers, analysts still expect 2024 S&P 500 earnings per share growth in the low double digits. Meanwhile, a strong labor market has consumers spending relatively freely. “With the labor market remaining strong and inflation trending lower, the Fed can be patient in cutting rates,” said Cooper Howard, a director of fixed income strategy at Schwab. “We expect three to four cuts this year, with the first occurring in May.” The Fed needs to see a consistent downtrend in the inflation rate toward its target to be comfortable starting an easing cycle, especially since the economy has been resilient. For more, listen to the latest audio Schwab Market Perspective.

Info tech time: Next week’s earnings calendar features a full helping of info tech results as Texas Instruments (TXN), Intel (INTC), and IBM (IBM) prepare to report. In Q4, analysts expect info tech to post another strong quarter on the bottom line with 15.6% EPS growth, research firm FactSet said. That’s up from the September 30 estimate of 14% and well above expected Q4 S&P 500 EPS growth of just below the flatline. Fourth quarter tech revenue is seen rising a respectable 6.1%, according to FactSet, just about doubling the overall market. Things could improve for tech as 2024 continues. Analysts expect 17% year-over-year EPS growth for the sector and 9.1% revenue growth in calendar year 2024, according to FactSet, up from 5.1% and 2.3%, respectively, in 2023. That puts tech second and first, respectively, among all sectors for those two metrics this year.

Raise a toast: The “glass half empty” view with the market on the verge of its first record high since early 2022 is that the SPX has basically returned to where it was two years ago. The “glass half full” argument is that U.S. interest rates were basically zero back then and above 5% now. The era of “free money” that helped ignite the 2021 rally is over, and major indexes successfully climbed the wall of rate worries since bottoming in October 2022. Though the market’s current valuation is on the high side historically, companies found ways to grow earnings despite the rate overhang. That said, much of the earnings growth is in the biggest handful of companies that swing an outsized influence with their massive market capitalizations.

Calendar

Jan. 22: Leading Economic Index (LEI) and expected earnings from United Airlines (UAL).

Jan. 23: Expected earnings from 3M (MMM), D.R. Horton (DHI), Johnson & Johnson (JNJ), Procter & Gamble (PG), Halliburton (HAL), Verizon (VZ), Netflix (NFLX), and Texas Instruments (TXN).

Jan. 24: Expected earnings from Abbott Labs (ABT), Kimberly-Clark (KMB), and IBM (IBM).

Jan. 25: December Durable Orders, December Durable Goods, Q4 GDP, December New Home Sales, and expected earnings from Alaska Air (ALK), American Airlines (AAL), Comcast (CMCSA), Dow (DOW), Union Pacific (UNP), Intel (INTC), and Visa (V).

Jan. 26: December Personal Income, December Personal Spending, December PCE Prices, and expected earnings from American Express (AXP).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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