Surging crude oil prices and Treasury yields raised the scepter of higher costs for businesses and consumers, sapping enthusiasm on Wall Street and damaging major indexes to start the week.
Soaring volatility, dollar strength, and worries about possible U.S. inflation also sparked today's selling, possibly discouraging the "risk-on" trading that recently led stocks to all-time highs. On a positive note, though, the broader market again bounced off technical support levels tested last week.
The benchmark 10-year Treasury note (TNX) yield's climb back above 4% today after Friday's monster nonfarm payrolls report puts heavy scrutiny on U.S. September inflation data due later this week. Cyclical sectors that often perform better when rates fall performed poorly today, with consumer discretionary and information technology down sharply. And hopes for a 50-basis-point Federal Reserve rate cut next month have fallen by the wayside, judging from CME futures trading.
"The payrolls report put 50 basis points to bed," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research.
Markets remain on edge from flaring Middle East tensions. Israel promised a response to last week's Iranian missile attack, but it's unclear when. A strike against Iran's oil infrastructure could further upend the crude market, though the United States and other producers might have enough spare capacity to make up for any decline in Iranian supplies.
Earnings and U.S. economic data are light early this week, building up to Thursday's inflation data and the unofficial start of earnings season Friday as big banks prepare to open their books. Analysts expect third-quarter S&P 500 earnings per share growth of 4.2%, down from expectations of nearly 8% in late June, according to research firm FactSet.
Here's where the major benchmarks ended:
• The S&P 500® index (SPX) fell 55.13 points (–0.96%) to 5,695.94; the Dow Jones Industrial Average® ($DJI) dropped 398.51 points (–0.94%) to 41,954.24; and the Nasdaq Composite® ($COMP) lost 213.94 points (–1.18%) to 17,923.90.
• The 10-year Treasury note yield (TNX) rose five basis points to 4.03%, near two-month highs.
• The Cboe Volatility Index® (VIX) climbed to 22.77, the highest in a month.
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly earnings, or other news:
• Alibaba (BABA) rose 2.62% after Macquarie upgraded shares to outperform from neutral with a price target of $145, up from $79.70. The firm sees "more upside from here" for the China internet sector, saying multiples still trade at only half of Q1 2023 levels "with materially better fundamentals."
• Apple (AAPL) fell 2.25% on a downgrade from Jeffries to hold from buy. Apple's smartphone hardware needs rework before being capable of serious AI, with a likely timeline of 2026 or 2027, the analyst told investors in a research note. Jefferies believes the high expectations for iPhone 16 and 17 "are premature."
• Pfizer (PFE) jumped 2.17% after Reuters reported that activist investor Starboard Value has taken a $1 billion stake and wants Pfizer to turn its performance around.
• Super Micro Computer (SMCI) climbed 15.79% after the company reported positive shipping data. It has deployed more than 100,000 graphics processing units (GPUs) with liquid cooling solutions (DLCs) for some of the largest AI factories ever built, the company said in a press release. This could amount to billions of dollars in orders, Barron's reported.
Three of the largest U.S. banks report Friday morning, preceded tomorrow morning by PepsiCo (PEP) and Thursday by Delta Airlines (DAL). Major airlines likely had a strong third quarter with crude prices falling and air fares rising. However, airline stocks are another story, unable to take off from summer lows after a spring rally.
Semiconductors are in the news with Nvidia (NVDA) and Advanced Micro Devices (AMD) hosting events this week. The Nvidia event began today, while AMD's takes place Thursday. With earnings season almost here, investors will likely have their antennas up for any word on new products, demand trends, and competition issues, especially in chips where mega-cap tech firms continue to rapidly build AI capabilities.
Nvidia happens to be one of the tech stocks to which Schwab clients added positions last month, along with Intel (INTC) and Palantir (PLTR), according to the Schwab Trading Activity Index (STAX) for September. However, overall investment exposure during the four-week period ending September 27 saw STAX sink 11%, the largest monthly decrease since June 2022. Unlike in early August when a sell-off on Wall Street led to a "buy the dip" move among investors tracked by STAX, the drop in early September didn't find buyers. This might reflect perceived weaker "seasonality," a climb in geopolitical tensions, and what at the time was a key looming Fed meeting.
On a sector basis, clients were net buyers of energy and consumer staples last month, while information technology, consumer discretionary, and communication services experienced the most selling, according to the STAX data.
Technically, it may be constructive that the SPX kept its head above 5,667 again today. That was the old all-time high set in July and also held on a test last week. It may represent support again in coming days. The Relative Strength Index (RSI) of major indexes, a momentum indicator, have fallen the last few days. Today's dollar strength could signal investors are seeking perceived shelter amid geopolitical tensions, but weakness in Treasuries and gold conflict with that theory.
Set your alarm for stimulus update from China
Don't shut down your monitor yet. Tonight (tomorrow morning China time), 30 minutes after Chinese markets open, the National Development and Reform Commission (NDRC) is scheduled to hold a briefing to discuss fiscal stimulus.
"The size, composition, and timing of the stimulus will be key for markets," said Michelle Gibley, director of international research at the Schwab Center for Financial Research. "The first 1.6 trillion yuan of spending only makes up for the existing budget shortfall, as policy has tightened this year. So, markets likely need an announcement of more than 2 trillion yuan in spending, and/or combined with signals of growing the stimulus in the future. The composition of the spending will also be important—investors will likely look more positively on spending targeted toward boosting consumption."
In addition, with China back from a holiday, "All eyes will be on travel and spending results from the holiday weekend as a sign of reviving consumer confidence," said Jeffrey Kleintop, chief global investment strategist at Schwab.
Fed minutes due Wednesday could shed light on the Federal Open Market Committee's (FOMC) 50-basis point "jumbo" cut and discussion preceding it. The meeting included the first dissent on a rate decision by a Fed governor since 2005, with Michelle Bowman voting for 25 basis points rather than 50.
"It'll be interesting to see the internal dialogue around their decision," said Alex Coffey, senior trading strategist at Schwab.
Thursday brings U.S. September Consumer Price Index (CPI) data, probably the economic benchmark this week. Analysts expect a 2.3% rise in headline CPI, down from 2.5% in August, and a 3.2% rise in core CPI, equal to August, according to Trading Economics. Core excludes volatile food and energy costs.
Late today, futures traders build in an 86% chance rates will fall 25 basis points at the FOMC meeting on November 6–7, based on the CME FedWatch Tool. There's a 14% chance of no change from current rates. That's quite a shift from a week ago when investors saw a one in three chance of a 50-basis-point cut next month. The market still builds in high odds of another 25-basis-point rate trim in December.
While the jobs report helped reset investors' rate cut expectations, it's important to keep perspective. One month never tells the whole story. From a longer-term view, whether it's three, six, or nine months, jobs growth has clearly trended lower, and it's helpful to smooth out the data over time rather than focusing on one print.
If yields stay up, it could disrupt the recent "good news is good news" trend in the markets. Strong economic data can look bearish for equities if it helps trigger inflation and prevents the Federal Reserve from cutting rates as much as investors had hoped. That happened earlier this year when stubborn inflation delayed expected rate cuts.
