(Bloomberg) — The stock rally lost momentum Friday as the market still posted its best week of 2024 amid speculation the Federal Reserve may cut interest rates as early as June.
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U.S. stocks wobbled after a record rise that pushed the S&P 500 up about 10% this year. In an almost broad-based weekly rise, the value rose more than 2% over the period. The market's resilience has left strategists scrambling to update their targets amid calls for consolidation or a pullback.
“With some sentiment and positioning indicators appearing positive, we would not be surprised to see a slight decline in the coming months,” said David Lefkowitz of UBS Global Wealth Management. “This could provide investors with a better opportunity to add to their equity positions.”
In the absence of economic data, traders kept an eye on Fedspeak. Jerome Powell's comments during a “Fed Listens” event did not concern monetary policy. Michael Barr, the Fed's vice chairman for supervision, said there would likely be significant changes to a proposal to force lenders to hold more capital.
The S&P 500 closed below 5,235. Nvidia Corp. extended its gains for the eleventh consecutive week. FedEx Corp. – an economic barometer – rose on solid earnings and a $5 billion buyback plan. Nike Inc. and Lululemon Athletica Inc. fell on weak forecasts.
The 10-year Treasury yield fell six basis points to 4.21%. The dollar was nearing its peak this year.
While there was relative calm at the end of the week, American stocks experienced sharp outflows ahead of the Fed's highly anticipated policy meeting.
U.S. equity funds suffered about $22 billion in redemptions in the week ending Wednesday, the largest since December 2022, Bank of America Corp. said in a note. citing data from EPFR Global. The trend was also a significant reversal from the previous week, when stocks saw record inflows.
The story goes on
Following the Fed's decision, stocks rallied, driven by the perception that the central bank was not as hawkish as feared. Policymakers maintained their forecast for three rate cuts this year, and Chairman Powell didn't seem too worried about the recent rise in inflation.
However, according to Ryan Grabinski of Strategas Securities, research into Fed interest rate cycles since the 1970s has shown that investors generally have more to fear from the first rate cut in a cycle than from a pause.
On average, the S&P 500 rose more than 5% in the 100 days between the Fed's last tightening and the first rate cut, he noted. However, the broader market's bottom exceeds a 23% decline within 200 days of the first consecutive rate cut.
Despite still elevated interest rates, recent housing, manufacturing and labor market data point to a robust economy.
“Six months ago, investors were largely bearish, with 'good news treated as bad news' and 'bad news treated as bad news,'” said Nationwide's Mark Hackett. “The pendulum has almost completely turned, with strong data seen as a sign of a 'soft landing' – while sluggish data reinforces the belief that the Federal Reserve will cut interest rates.”
This has given the market impressive momentum, noted Hackett. The technicals underlying the recent stock rally were impressive – more than three-quarters of the S&P 500 was above the 200-day moving average – the best level since 2021, he noted.
One of the few Wall Street forecasters who correctly predicted last year's stock market rally is once again in a contrarian position. But this time, Brian Belski believes the stock market is headed for a crash – just as many of his colleagues are optimistic.
A correction is imminent after stocks rose too hard and too fast because of false optimism about when the Fed would soon cut interest rates, BMO Capital Markets' chief investment strategist and longtime bull said in an interview.
Bill Gross, the one-time bond king, warned that investors are in for a bumpy ride as “excessive exuberance” grips financial markets.
“It tells me that deficit spending and AI enthusiasm have been dominant factors, and momentum and 'irrational' exuberance have dominated markets since 2022,” wrote Gross, co-founder and former chief investment officer of Pacific Investment Management Co. in his current investment outlook. “Buckle up for excessive exuberance.”
Meanwhile, HSBC strategists became the latest on Wall Street to say stocks are not in a bubble despite the strong rally since last year. Max Kettner's team increases its rating on US stocks from “neutral” to “tactically overweight”.
“A renewed acceleration in inflation is a risk, but what matters is when central banks and markets really care,” they said. “We are still a long way from that.”
Stock valuations outside the U.S. are comparatively more attractive following the recent rally in tech megacaps, according to Goldman Sachs Group Inc. strategist Peter Oppenheimer.
“We think technology will still be critical and will do well, but as interest rates come down and we see that soft landing, the chances of expansion into some more cyclical parts of the market improve,” Oppenheimer told Bloomberg Television .
“U.S. stocks remain in an uptrend, but are still vulnerable to a possible upcoming consolidation/correction in our view,” said Dan Wantrobski of Janney Montgomery Scott. “The momentum is pushing several areas (not just mega-cap leadership) into overbought/extended territory in the near term – which continues to be a concern for us from a technical perspective.”
Still, overall market breadth continues to grow, he added, pointing to the fact that the cumulative forward and backward line for stocks on the New York Stock Exchange is now on the verge of hitting new all-time highs.
“This is an important metric to watch as it shows that markets are no longer driven by just a few names (such as Mag 7) but are in full swing across multiple market caps and sectors,” Wantrobski said.
Company highlights:
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Tesla Inc. has cut production at its factory in China as sales of electric vehicles grow slowly and competition is intense in the world's largest auto market, according to people familiar with the matter.
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Nike Inc. warned that sales will decline as it responds to growing challenge from emerging running shoe brands such as On and Hoka, which have highlighted the U.S. sportswear company's reliance on classic basketball models such as the Air Force 1.
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FedEx Corp. beat Wall Street's third-quarter earnings expectations and announced a new $5 billion share buyback plan, as the Courier said it was seeing results from a plan to cut costs and boost margins.
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Lululemon Athletica Inc. reported a slowdown in its U.S. business and a worse-than-expected outlook for the first quarter and full year.
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Grifols SA sank as investors evaluated a regulatory audit of the Spanish life sciences company's financial reports that found “relevant deficiencies” but no major accounting errors.
Some of the key moves in the markets:
Shares
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The S&P 500 fell 0.1% as of 4 p.m. New York time
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The Nasdaq 100 rose 0.1%
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The Dow Jones Industrial Average fell 0.8%
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The MSCI World Index fell 0.3%
Currencies
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The Bloomberg Dollar Spot Index rose 0.4%
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The euro fell 0.5% to $1.0806
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The British pound fell 0.5% to $1.2594
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The Japanese yen rose 0.1% to 151.44 per dollar
Cryptocurrencies
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Bitcoin fell 2.4% to $63,888.13
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Ether fell 4.1% to $3,342.24
Tie up
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The 10-year Treasury yield fell six basis points to 4.21%
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The yield on 10-year German government bonds fell eight basis points to 2.32%
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The 10-year UK government bond yield fell seven basis points to 3.93%
raw materials
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West Texas Intermediate crude fell 0.3% to $80.79 a barrel
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Spot gold fell 0.8% to $2,163.66 an ounce
This story was produced with support from Bloomberg Automation.
– With support from Sagarika Jaisinghani, Ye Xie and Alexandra Semenova.
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