Powell's Comments on Inflation
S&P 500, Nasdaq Eye Fresh Records as Powell Notes Inflation Progress
Treasury Yields and Corporate News
Market Overview
US stocks rallied on Tuesday as investors responded to Federal Reserve Chair Jerome Powell's positive comments on inflation. The Dow Jones Industrial Average (^DJI) rose nearly 0.3%, the S&P 500 (^GSPC) added 0.4%, and the tech-heavy Nasdaq Composite (^IXIC) gained nearly 0.7%. Both the S&P 500 and Nasdaq are on track for record closes.
Job Market Resilience
The market's positive movement followed new data from the Bureau of Labor Statistics, which showed 8.14 million job openings at the end of May, up from 7.92 million in April. This increase suggests a resilient labor market despite recent concerns over softer economic data.
Powell's Comments on Inflation
Jerome Powell's remarks cheered investors. He acknowledged the progress in cooling inflation but emphasized that the Federal Reserve needs more evidence before considering interest rate cuts. He noted that the latest inflation readings from April and May suggest the economy is returning to a disinflationary path.
Treasury Yields and Corporate News
The 10-year Treasury yield (^TNX) slightly decreased to 4.43% after a significant single-day gain on Monday. On the corporate front, Tesla (TSLA) delivered more vehicles than expected in the second quarter, boosting its shares by nearly 10%.
High Expectations for Q2 Earnings Season
Wall Street has set high expectations for the upcoming earnings season, which kicks off with big banks reporting on July 12. Consensus forecasts predict a 9% year-over-year earnings growth for the second quarter, marking the largest gain since Q4 2021.
However, strategists are cautious about the potential upside for investors. Goldman Sachs' chief US equity strategist David Kostin noted that earnings beats and subsequent stock pops could be less frequent than usual due to high consensus forecasts. Kostin pointed out that companies that beat expectations last quarter outperformed the S&P 500 by just three basis points the following day, well below the historical average of 100 basis points. He expects the reward for earnings beats to be smaller than average this quarter.
Deutsche Bank's chief equity strategist Binky Chadha echoed this sentiment. His analysis shows that the S&P 500 typically rises 80% of the time during earnings season, with an average return of 2%. However, he cautioned that the market's run-up into earnings season and overweight equity positioning might result in a muted rally.
Conclusion
As the third quarter begins, investors are optimistic about the stock market's performance, buoyed by positive economic data and earnings expectations. However, caution remains due to the high bar set for earnings season and ongoing concerns about inflation and interest rates.