S&P 500 sees best three-day rally since November

Stocks saw their best three-day rally since November, fueled by speculation the Federal Reserve will be able to cut interest rates this year.

The S&P 500 rose 1% after topping its average price of the past 50 days — a level seen by many chartists as key in maintaining the positive sentiment. A solid earnings season kept driving optimism after a pullback that made some areas of the market attractive. While the below-average trading volume raised concern about the sustainability of the advance, most industries gained.

“Bulls will be looking to maintain their momentum after snatching last week from the jaws of bears,” according to Chris Larkin at E*Trade from Morgan Stanley. “This week is light on high-profile economic data, but heavy on Fed members hitting the speaking circuit. Traders will be dissecting any comments they make about potential rate cuts.”

The US equity benchmark rose above 5,180. Nvidia Corp. and Tesla Inc. paced gains in megacaps. Micron Technology Inc. jumped on an analyst upgrade. Apple Inc. fell, with Warren Buffett revealing he’d cut his stake even after heaping praise on the iPhone maker. Treasury 10-year yields slid two basis points to 4.49%.

Traders also kept an eye on the latest geopolitical developments, with Israel rejecting a statement from Hamas that it had accepted a cease-fire proposal to end the fighting in Gaza. Oil closed higher.

Following Jerome Powell’s not-very-hawkish tone last Wednesday, investors waded through remarks from some of the many Fed officials due to speak this week.

Fed Bank of Richmond President Thomas Barkin said he expects high rates to slow the economy further and cool inflation to the 2% target. His New York counterpart John Williams said eventually there will be rate cuts — but the decision on when will depend on the totality of the data.

Despite pressure from still elevated rates, strong corporate results have justified high stock valuations, according to strategists at BlackRock Investment Institute.

“Solid corporate earnings keep us overweight US stocks,” a team led by Jean Boivin and Wei Li said Monday in their weekly market commentary.

More than 80% of the S&P 500 companies have now reported first-quarter earnings, and profit growth has easily surpassed “mediocre expectations”, according to Gina Martin Adams at Bloomberg Intelligence. The index is now on pace for a 6.5% earnings growth, almost double pre-season estimates of 3.75%, she noted.

Bets on double-digit earnings growth this year for companies in the S&P 500 are too lofty as Corporate America is likely to be challenged by higher rates, according to JPMorgan Chase Co.’s Marko Kolanovic.

“Consensus earnings expectations for this year look too optimistic,” he wrote. Analyst projections imply S&P 500 earnings will rise 17% from the first to fourth quarter, a feat that requires high topline growth or substantial expansion, he added.

“Better than expected Q1 S&P 500 earnings and the recent pullback in stock prices brought P/E multiples of several key US benchmarks back to attractive levels in our view,” said John Stoltzfus at Oppenheimer Asset Management.

The backdrop for stocks remains supportive, driven by healthy and broadening profit growth, inflation that will likely resume falling, a Fed that is more likely to cut than hike rates, and surging investment in artificial intelligence, according to David Lefkowitz at UBS Global Wealth Management.

Adam Turnquist at LPL Financial remarked that stock-market breadth remains robust and momentum is also improving.

Meantime, hedge funds are reversing their bearish stance on consumer stocks as the latest economic data and comments from the Fed revive bets on rate cuts.

After four weeks of selling, hedge funds last week piled into consumer discretionary stocks, which saw the largest net buying during the week ended May 3, according to data compiled by Goldman Sachs Group Inc.’s prime brokerage desk. The move was driven by long buys as well as the largest short covering since December 2023.

“Mixed” messages from key US economic data and the accompanying swings in stock markets mean investors should load up on defensive sectors such as consumer staples, according to Morgan Stanley strategists.

A soft landing or a so-called no landing, where growth is resilient even as rates stay high, both remain possible for the US economy, the team led by Michael Wilson wrote in a note. This uncertain backdrop warrants an investment approach that can work as market pricing and leadership between groups of stocks gets whipsawed by the potential outcomes.

In corporate earnings, Arm Holdings Plc should show it continued to benefit from artificial-intelligence demand when it reports this week. Airbnb Inc. may be among gig economy companies posting slower growth. Uber Technologies Inc. should be a bright spot as it expands its pool of drivers and merchants, drawing more active users.

Walt Disney Co., fresh off a victory in its proxy fight against activist investor Nelson Peltz, is set to impress as cost-cutting efforts take hold, the bet on streaming gets closer to paying off and its theme parks keep drawing visitors.

Corporate Highlights:

• Boeing Co. faces a new investigation by US aviation safety regulators tied to inspections of the company’s 787 Dreamliner and whether employees may have falsified records.
• The US Securities and Exchange Commission warned Robinhood Markets Inc. that it faces an enforcement action over its crypto business — the latest sign that the regulator isn’t letting up on its years-long crackdown on digital assets.
• Chip-design company Synopsys Inc. is selling its software integrity business to two private equity firms for as much as $2.1 billion in cash.
• Tyson Foods Inc. said persistent inflation has eroded consumers’ appetite for the branded and ready-to-eat offerings accounting for most of the company’s profits.
• United States Steel Corp. was raised to overweight at Morgan Stanley, based on prospects for “transformational” investments.
• Exxon Mobil Corp. Chief Executive Officer Darren Woods foresees arbitration with Chevron Corp. over a premier Guyanese asset stretching into 2025 due to the importance of the case to both companies.
• Brookfield Asset Management struck a partnership with Castlelake LP to get a majority share of the private debt firm’s fee-related earnings, another move in the Canadian investing giant’s effort to grow its credit business.

Key events this week:

• Australia rate decision, Tuesday
• Eurozone retail sales, Tuesday
• UBS earnings, Walt Disney, BP earnings, Tuesday
• Minneapolis Fed President Neel Kashkari speaks, Tuesday
• Toyota earnings, Wednesday
• Germany industrial production, Wednesday
• Fed Governor Lisa Cook speaks, Wednesday
• Bank of Japan issues summary of opinions from April policy meeting, Thursday
• China trade, Thursday
• UK BOE rate decision, Thursday
• US initial jobless claims, Thursday
• UK industrial production, GDP, Friday
• ECB publishes account of April policy meeting, Friday
• BOE Chief Economist Huw Pill speaks, Friday
• US University of Michigan consumer sentiment, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1% as of 4 p.m. New York time
• The Nasdaq 100 rose 1.1%
• The Dow Jones Industrial Average rose 0.5%
• The MSCI World index rose 0.8%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0767
• The British pound rose 0.1% to $1.2560
• The Japanese yen fell 0.6% to 153.94 per dollar

Cryptocurrencies

• Bitcoin fell 0.9% to $63,198.63
• Ether fell 2.2% to $3,069.07

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.49%
• Germany’s 10-year yield declined three basis points to 2.47%
• Britain’s 10-year yield was little changed at 4.22%

Commodities

• West Texas Intermediate crude rose 0.7% to $78.63 a barrel
• Spot gold rose 1% to $2,325.39 an ounce

This story was produced with the assistance of Bloomberg Automation.

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