Closing Market Update

Published as of: January 8, 2024, 4:40 p.m. ET 

(Monday market close) The S&P 500^® index (SPX) and the Nasdaq Composite^® (COMP) posted firm gains Monday to end at their highest closes of the year so far as the market bounced back from a soft start to 2024 and investors look ahead to key monthly inflation numbers and big bank earnings later this week.

The Dow Jones Industrial Average^® (DJI) posted a modest gain despite a slump in member Boeing (BA), which fell 8% after the Federal Aviation Administration (FAA) temporarily grounded dozens of the company's 737 Max 9 aircraft after a section of an Alaska Air Group (ALK) plane blew out Friday night. Strength in semiconductors helped lift the Nasdaq.

Otherwise, investors moved past last week's mixed jobs numbers and waited for the Consumer Price Index (CPI) and the Producer Price Index (PPI) reports Thursday and Friday. Both reports will be studied closely for clues to the path of Federal Reserve interest rate policy.

According to Kevin Gordon, senior investment strategist at Schwab, a pullback in Treasury yields helped fuel buying interest Monday after last week's upturn in yields weighed on equities. A favorably viewed inflation outlook from the New York Fed also buoyed investors.

"We're still seeing that yields are in the driver's seat for equities, at least in the near term," Gordon said. He added that the market expected the inflation updates later this week to echo the gradually easing price pressures seen in previous reports, though he cautioned to be mindful of potential surprises in certain segments.

Both CPI and PPI "will probably confirm the same themes we've been seeing," Gordon said. "But I would keep an eye on any rebound in goods inflation. It's not that I think we're at risk of what happened in 2021, but mostly because a lot of the disinflation or deflation in goods has seemingly played out almost fully."

Here's where the major benchmarks ended:

• The S&P 500 index was up 66.30 points (1.4%) at 4,763.54; the Dow Jones Industrial Average was up 216.90 points (0.6%) at 37,683.01; the Nasdaq Composite was up 319.70 points (2.2%) at 14,843.77.
• The 10-year Treasury note yield (TNX) was down about 3 basis points at 4.015%.
• The Cboe^® Volatility Index (VIX) was down 0.28 at 13.07.

Bond yields and stock prices often move inversely to each other, in part because higher interest rates on virtually risk-free bonds lower the premium investors can expect from riskier assets like stocks, making it less appealing to buy equities. Last week, the 10-year Treasury yield briefly increased to 4.10%, near a three-week high, before dropping back near 4% Monday.

Semiconductors shares were among the strongest performers, helped by a surge of 6.4% in Nvdia Corp. (NVDA), the top 2023 performer in the S&P 500 with a gain of 239%. Small-cap stocks were also firm as were consumer discretionary and communication services. The Russell 2000^® Index (RUT) gained 1.9% to partly climb back from last week's 3.7% drop. Energy shares were soft because crude oil futures sank nearly 4% following reports Saudi Arabia lowered its prices.

The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:

• American Airlines (AAL) rose 7.2% after Morgan Stanley (MS) upgraded the stock from "overweight" to "equal weight," saying the firm is "constructive" on U.S. airlines in 2024 after the industry weathered unusual events the past four years.
• Axonics (AXNX) rallied over 20% after Boston Scientific agreed to acquire the biotechnology firm for $71 per share, an equity value of about $3.7 billion.
• Alaska Air Group fell 0.2% following the report of a door blowout, and Spirit AeroSystems (SPR), which made and installed the door, dropped 11%.
• Dell Technologies (DELL) gained 4.6% after JPMorgan (JPM) upgraded the personal computer maker from "neutral" to "overweight" and raised its price target from $77 to $90, citing the company's "leverage" to the AI-led compute investment cycle.
• Equifax (EFX) rose nearly 4% after Bank of America (BAC) upgraded the credit reporting company from "underperform" to "buy," citing a bullish mortgage outlook driven by expectations for Fed rate cuts.
• Nvdia rose to an all-time high after the company announced three new AI-powered graphic chips that can be used on PCs or laptops.
• Shell PLC (SHEL) fell 1.7% after the oil and gas company said it expects a non-cash post-tax write-down of between $2.5 billion to $4.5 billion in the fourth quarter of 2023.
• Toll Brothers (TOL) rose 2.4% after Wolfe Research upgraded the homebuilder from "peer perform" to "outperform," citing strong cash flow and an expected "thawing" in a buyer market the company is targeting. 

The next quarterly earnings season unofficially kicks off Friday, with several major banks expected to report results including Bank of America, Citigroup (C), JPMorgan Chase, and Wells Fargo (WFC). Those big four will be followed by Goldman Sachs (GS), Morgan Stanley, and PNC financial Services Group (PNC) reporting results January 16.

Before the big banks take center earnings stage, Taiwan Semiconductor Manufacturing Co. (TSM) is expected to report results Thursday. The company's stock rose 40% last year behind a wave of AI-driven bullishness that lifted the semiconductor sector.

Fourth-quarter earnings for S&P 500 companies are expected to grow 1.3% from the same period in 2022, weaker than the 2.4% year-over-year growth in the third quarter but still the second consecutive quarter with a gain. Analysts expect nearly 12% year-over-year earnings per share (EPS) growth for 2024.

Inflation promises to be a front-burner subject for investors this week amid widespread expectations that steadily easing price pressures over the past year have the Fed poised to "pivot" to a series of cuts to its benchmark funds rate, which remains at 22-year highs.

The first inflation numbers of the week came early Monday, as the New York Fed said a recent survey showed consumers' one-year inflation outlook fell to its lowest level since January 2021. Based on the survey's median figure, consumers expect inflation to be about 3% a year from now. By contrast, in January 2023, the median was 5%.

Thursday's CPI report may be the most anticipated economic news of the week. Analysts expect December's overall CPI to post a 0.2% increase over November, based on a consensus estimate from Briefing.com. The closely followed core rate, which excludes volatile food and energy prices, is expected to rise 0.2% over November.

Compared to year-earlier levels, December core CPI is expected to slow slightly to a 3.8% increase, down from a 4.0% annual gain posted for November. 

CPI is one of several gauges that showed a similar pattern of gradually easing inflation over the past year, though inflation remains above the Fed's 2% long-term target. For the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, the core rate in November rose 3.2%, the smallest annual increase since April 2021.

Slower inflation has fueled beliefs that the Fed may lower its benchmark rate five or six times in 2024, potentially as soon as March. But according to Kathy Jones, chief fixed income strategist at Schwab, such expectations may be premature.

"As long as CPI is heading in the right direction, the markets are likely to keep the potential for a March rate cut at about 60%," Jones said. "But we think May is a more likely starting point for a Fed rate cut. The economy continues to be resilient and Fed members may want to see more evidence that inflation is continuing to decline."

Late Monday, futures traders assessed about 95% odds the Federal Open Market Committee (FOMC) will hold its benchmark funds rate target unchanged at 5.25% to 5.5% following its January 30 – 31 meeting, according to the CME FedWatch Tool. The market prices in a 61% chance the funds rate will be a quarter point lower after the Fed's March meeting, down from 73% a week ago.