Closing Market Update

Stocks Tumble Amid Diminished Fed Rate Cut Hopes

May 23, 2024 Joe Mazzola
A surge in manufacturing and services activity drove yields higher, erasing the initial Nvidia-driven rally.

Published as of: May 23, 2024, 4:40 p.m. ET 

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(Thursday market close) U.S. stocks tumbled Thursday after a jump in U.S. manufacturing and services activity further dampened hopes for Federal Reserve interest rate cuts, sparking a broad sell-off that erased an initial rally fueled by Nvidia's (NVDA) blowout quarterly results. A slump in Boeing (BA) pulled the Dow Jones Industrial Average® ($DJI) to a two-week low.

Earlier Thursday, S&P Global reported its Global Flash US Composite PMI® for May rose to 54.4, up from 51.3 in April and the highest level in over two years. Indexes tracking manufacturing and services sectors also climbed. The numbers came about a day after minutes from the Federal Open Market Committee's (FOMC) recent meeting indicated Fed leaders remain cautious over inflation.

Among companies, Boeing fell almost 8% following reports the aerospace manufacturer expected negative free-cash flow and a continued slide in deliveries during the current quarter.

The PMI strength sparked a jump in Treasury yields as bond traders scaled back expectations for Fed rate cuts this year, according to Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. The 10-year Treasury note yield (TNX) climbed near 4.50%, its highest level in over a week.

The PMI readings "signal reacceleration of economic activity and follow Wednesday's relatively hawkish FOMC minutes," Peterson said. The FOMC minutes "showed some committee members were discouraged by progress on inflation and questioned whether current policy is restrictive enough."

As a result, next week's updated estimate of first-quarter gross domestic product (GDP) and Personal Consumption Expenditure (PCE) price report "will be highly watched," Peterson said. The PCE is the Fed's preferred inflation gauge. Odds for a Fed rate cut in September have dropped to just above 50% from around 75% at the start of the week, Peterson added, citing market indicators.

Here's where the major benchmarks ended:

  • The S&P 500® index (SPX) fell 39.17 points (0.7%) to 5,267.84; the Dow Jones Industrial Average lost 605.78 points (1.5%) to 39,065.26; the Nasdaq Composite® ($COMP) shed 65.51 points (0.4%) to 16,736.03.
  • The 10-year Treasury note yield rose more than 4 basis points to 4.479%.
  • The Cboe Volatility Index® (VIX) rose 0.48 to 12.77.

Financial shares were among Thursday's weakest performers amid ideas a "higher-for-longer" Fed rate outlook could pressure bank margins. The KBW Regional Bank Index (KRX) dropped almost 3% to a three-week low. Other interest-rate-sensitive sectors, including real estate and utilities, took pressure.

In other markets, WTI Crude Oil (/CL) futures fell for the fourth straight trading day and closed at a three-month low under $76 per barrel.

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Stocks on the move

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

  • Live Nation Entertainment (LYV) sank 7.8% after the U.S. Department of Justice sued the company to break up the Ticketmaster parent over alleged antitrust violations, saying the ticket seller "abuses its illegal monopoly."
  • Nvidia held on to a 9.3% gain and closed at a record high above $1,000 after the semiconductor leader reported stronger-than-expected quarterly results late Wednesday that included a four-fold surge in revenue to about $28 billion. The company also announced a 10-for-1 stock split.
  • Snowflake (SNOW) fell 5.4% after the cloud-computing company reported stronger-than-expected first-quarter revenue but also weaker-than-expected earnings.
  • Taiwan Semiconductor Manufacturing (TSM) gained 0.6% after the chip company forecast 10% annual revenue growth for the global semiconductor industry.
  • Titan Machinery (TITN) plunged almost 15% after the farm equipment manufacturer's first-quarter results disappointed investors. 

First-quarter earnings season is almost complete, but a few major companies are expected to report next week. Those companies include Dow member Salesforce (CRM), which is scheduled to report results Tuesday, and retailers Best Buy (BBY), Costco Wholesale (COST), and Dollar General (DG) on Thursday.

Business activity accelerates

While S&P Global's report seemed to bring good news on the economy, it also fueled ideas that growth may be a little too strong to bring inflation down to the Fed's 2% long-term target. The firm's number, combined with Wednesday's FOMC minutes, prompted investors to rein in the renewed rate cut optimism that followed last week's cooler-than-expected April Consumer Price Index (CPI).

S&P Global's services index rose to 54.8 in May, up from 51.3 in April and a 12-month high, while its manufacturing index rose to 52.4 from 51.1. Both figures were above the 50 level that's typically viewed as indicative of expansion. 

U.S. business activity growth "accelerated sharply" in May, S&P Global said in its report. The service sector led the upturn, reporting its largest output rise for a year, and manufacturing also showed stronger growth. 

"Although companies continued to report lower employment, the rate of job losses moderated amid improved business confidence for the year ahead and higher order book intakes," S&P Global said, noting price pressures also ticked higher.

"Both input costs and output prices rose at faster rates, with manufacturing having taken over as the main source of price growth over the past two months," S&P Global said. "However, the overall rate of selling price inflation remained below the average seen over the past year."

Late Thursday, traders priced 51% odds the fed funds rate will be at least one quarter point lower following the FOMC's September meeting, based on the CME FedWatch Tool. Odds of a July rate cut were pegged at just 10%.

Friday brings another report that could shape investors' inflation and interest rate outlook: the Census Bureau's Durable Goods numbers for April. 

After the upcoming three-day holiday for the U.S. Memorial Day weekend, the market resumes trading Tuesday, with next Friday's April PCE report looming. In March, PCE rose 0.3% in both the overall and core rates, matching analyst expectations. Year-over-year comparisons slightly exceeded forecasts, underscoring inflation's early 2024 resurgence.