A late session reversal by market-cap heavyweight Apple (AAPL) Monday kept the S&P 500® Index (SPX) from ending at a level that would have signaled the start of a fresh bull market for the index, while fading excitement over the conclusion of the debt-ceiling standoff made for a soft day of trading.
With the debt deal in place, investors turned their attention to Apple, whose Worldwide Developers Conference began Monday. The event featured the launch of a new "mixed-reality" headset that costs around $3,500, reports said. Investors appeared to be underwhelmed, though, as Apple's stock fell sharply after the unveiling despite briefly touching a record high of near $185 earlier in the day.
Schwab Senior Investment Strategist Kevin Gordon said a weaker-than-expected report on service sector activity from the Institute for Supply Management (ISM) may also have weighed on the market. The ISM Services Index fell to 50.3 in May from 51.9 in April. Anything below 50 indicates activity is shrinking.
The ISM figure "is fanning some fear that the services side of the economy is following the downward trajectory of the manufacturing side. I'd caution against taking too much away from one month's worth of data, though," Kevin says, adding "It seems like the market is unwinding a bit of the gains notched on Friday."
Here is where the major benchmarks ended Monday:
- The S&P 500 Index was down 8.58 points (0.2%) at 4273.79; the Dow Jones Industrial Average (DJIA)was down 199.90 (0.6%) at 33,562.86; the Nasdaq Composite was down 11.34 (0.1%) at 13,229.43.
- The 10-year Treasury note yield (TNX) was little changed at 3.693%.
- Cboe's Volatility Index (VIX) was up 0.13 at 14.73.
Regional banks and retailers were among the weakest performers Monday. Oilfield services shares were also under pressure, despite continued gains in crude oil futures after weekend reports that Saudi Arabia had decided to cut crude production. Communication Services and Utilities were among the strongest sectors.
Stocks on the move
The following companies had news-driven stock price moves:
- Apple's shares were down about 0.8% after rising as much as 2.2% earlier Monday after announcing a slate of pricy new products.
- Dollar General (DG) stock was downgraded by Morgan Stanley, which cited concerns over the company's resiliency in current economic conditions, according to media reports. Shares of Dollar General were down 4.3%
- Estee Lauder (EL) was downgraded to "perform" from "outperform" by Oppenheimer, which said the cosmetics company will struggle to meet Wall Street expectations. Estee Lauder shares fell 3.8%.
- Ford (F) was upgraded by Citi to "buy" from "neutral," citing an improved outlook for U.S. auto sales following a proprietary survey. Ford shares were up 1.6%.
- Palo Alto Networks (PANW) shares rose after S&P Dow Jones Indices announced Friday the cybersecurity company will replace Dish Network (DISH) in the S&P 500 on June 20. Palo Alto shares rose 4.4% and Dish Network's stock fell 2.7%.
- Spotify (SPOT) said Monday it will lay off 200 employees in its podcast division, or about 2% of its workforce, reports said. Shares of the streaming music service rose 3%.
- Target (TGT) was downgraded to "sector weight" from "overweight" by KeyBanc, which said resumption of student loan repayments could squeeze the retailer's margins. Target shares fell 2%.
- Valley National Bancorp (VLY) shares were upgraded by JPMorgan to "overweight" from "neutral," saying concerns over the regional bank's commercial real estate appears "overblown," reports said, Valley National shares still dropped 1.6%.
Quarterly earnings season is effectively complete. Overall S&P 500 earnings per share (EPS) were down 2.1% from a year earlier, according to Factset. That makes the first three months of 2023 the second straight quarter of declining year-over-year EPS. That is often defined as an "earnings recession." Still, things turned out much better than the 6% drop analysts had initially expected.
ISM index disappoints
The May services sector activity report from ISM indicates just barely over half of businesses surveyed reported growing activity instead of a contraction. ISM also said new orders declined 3.2 points to 52.9.
"There has been a pullback in the rate of growth for the services sector," ISM Chair Anthony Nieves says in a statement, which cited a decrease in employment and sluggish demand. "The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy," he adds.
The ISM data contrasts with the stronger-than-expected payroll growth of 339,000 the Labor Department reported for May on Friday. But the apparently mixed state of the labor market seems to have reinforced expectations the Federal Reserve may consider keeping interest rates where they are at its meeting next week.
"The job figures were strong enough to keep the Fed in hiking mode, but the details were not strong enough to stop a 'pause' in rate hikes," says Kathy Jones, Schwab's chief fixed income strategist.
The ISM services index "may be more important right now, as the service sector has been the driving force behind overall economic growth, and especially job growth," Kathy says. "The drop in new orders, employment, and business activity to the lowest levels since the Fed began tightening are significant. It looks like the lagged effect of tighter monetary policy is working its way through the economy."
Late Monday, market watchers saw a 79% probability of the Fed leaving rates unchanged at the June 13–14 meeting, according to the CME FedWatch tool, though there's a slightly better than 50% chance of another hike in July.
"We look for the Fed to hold rates steady at the upcoming meeting but keep the door open to another hike down the road," Kathy says. "It's clear that the Fed doesn't want to signal that it has given up on the inflation fight too early. However, with credit conditions tightening and the economy slowing—a skip at this meeting would allow them to assess where the economy is heading."
