[HEADLINE]Markets Rally on Strong Corporate Earnings and Tamed Fed Rate Hike Expectations[/HEADLINE]
The S&P 500 closed up 0.62% on Friday, the Dow Jones Industrial Average gained 0.28%, and the Nasdaq 100 surged 1.19%. September E-mini S&P futures rose 0.55%, and the Nasdaq futures advanced 1.17%, reflecting broad market optimism.
Stock indices found support on Friday as corporate earnings results provided a tailwind and expectations around the Federal Reserve’s rate hike trajectory were tempered. Bond yields fell after the unexpectedly weak July nonfarm payroll report and modestly higher-than-projected average hourly earnings, which reinforced speculation that the Fed would not be compelled to raise rates at the upcoming FOMC meeting. The 10-year Treasury yield fell 3 basis points to 4.65%. The payroll data reduced the probability of a Fed rate increase at the next FOMC meeting from 58% to 44%.
Atlassian surged more than 36% to lead software stocks higher following a stronger-than-expected first-quarter revenue forecast. Cybersecurity stocks also rallied, with Cloudflare jumping 4% after better-than-expected quarterly earnings. Chipmakers received a boost as Microchip Technology rallied over 13% on a forecast of stronger-than-expected net sales for the following quarter.
US July nonfarm payrolls fell by 23,000 unexpectedly, below the consensus estimate of an increase of 80,000 and marking the first decline in five months. June payrolls were revised downward to show an increase of 20,000 from the previously reported figure of 57,000. The July unemployment rate fell unexpectedly to 4.1%, a 13-month low, indicating a stronger labor market than the 4.2% level previously expected. US July average hourly earnings rose 0.1% month-over-month and 3.2% year-over-year, both below consensus expectations of 0.3% and 3.5%, respectively.
US June consumer credit rose $14.173 billion, above the consensus estimate of $11.850 billion.
Thursday evening, St. Louis Fed President Alberto Musalem said policymakers cannot tolerate higher inflation and emphasized that it is crucial to impose meaningful restraint on underlying inflation rather than allowing somewhat higher inflation in the short term in pursuit of productivity growth.
Sep WTI crude oil prices rose more than 1% on Friday as the market awaited news of an Iran-Oman agreement to partially reopen the Strait of Hormuz. A joint statement from the two countries is under review, and the route would remain active for two to four months, though the agreement does not guarantee a full reopening. Iran said that normalization of the strait would depend on the United States lifting its blockade on Iranian ports.
However, crude prices gave up their gains in post-market trading on Friday after Reuters reported that the United States would lift its blockade of Iranian ports once a deal to reopen shipping through the Strait of Hormuz is announced.
The Wall Street Journal reported that Arab negotiators are concerned that Iran’s diplomats may not be able to guarantee compliance with any agreement reached, as Iran’s lead negotiators are under pressure from hardline officials to secure more explicit references to Iran’s role in the strait and clearer benefits. On Thursday, Iran’s semi-official Fars news agency reported that vessels belonging to the United States, Israel, or any other nation that has “caused damage” to Iran would be prohibited from the Strait of Hormuz under the proposed deal with Oman to reopen the waterway, which would restrict some oil exports from several Gulf States.
The outlook for strong Q2 earnings is a bullish factor for stocks. Bloomberg Intelligence forecasts suggest that Q2 earnings may increase by 23%, close to Q1’s outperformance of 30%, which was more than double the 12% that analysts had expected. AI spending is expected to account for most of the earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500’s earnings-per-share growth in Q2. So far, earnings results have been positive, with 86% of the 440 S&P 500 companies that have reported Q2 earnings beating estimates.
The markets are discounting a 44% chance of a 25 basis point rate hike at the next FOMC meeting on September 15-16.
Overseas stock markets settled mixed on Friday. The Euro Stoxx 50 climbed to a new all-time high and closed up 0.33%. China’s Shanghai Composite reached a three-week high and closed up 1.02%. Japan’s Nikkei-225 Stock Average closed down 0.12%.
Interest rates: September 10-year T-notes closed up 4.5 ticks on Friday. The 10-year T-note yield fell 2.4 basis points to 4.654%. T-note prices rose on Friday after the Fed-friendly July payroll report showed an unexpected decline in nonfarm payrolls and a smaller-than-expected increase in average hourly earnings, bolstering speculation that the Fed would not be forced to raise rates at any point. T-notes fell back from their best level on Friday as stocks rallied, which curbed safe-haven demand for government debt securities.
European government bond yields moved lower on Friday. The 10-year German bund yield fell 0.8 basis points to 3.132%. The 10-year UK gilt yield fell 1.6 basis points to 4.921%.
German economic data came in better than expected. German June exports rose 0.9% month-over-month, stronger than the consensus estimate of 0.5%. German June imports rose 4.4% month-over-month, above expectations of 2.0%. German June industrial production rose 0.2% month-over-month, as expected.
Markets are discounting an 85% chance of a 25 basis point ECB rate hike at its next policy meeting on September 10.
US Stock Movers: Microchip Technology (MCHP) closed up more than 13% to lead chipmakers higher following a forecast of Q2 net sales of $1.59 billion to $1.62 billion, which was well above the consensus estimate of $1.56 billion. Also, Qualcomm (QCOM) closed up more than 4%, and Marvell Technology (MRVL), NXP Semiconductors (NXPI), and Analog Devices (ADI) closed up more than 3%. Nvidia (NVDA), Applied Materials (AMAT), ASML Holding (ASML), KLA Corp (KLAC), and Texas Instruments (TXN) closed up more than 2%.
Atlassian (TEAM) closed up more than 35% to lead software stocks higher after forecasting stronger-than-expected Q1 revenue. Palantir Technologies (PLTR) closed up more than 10% and ServiceNow (NOW) closed up more than 6%. Workday (WDAY) closed up more than 5%, and Salesforce (CRM) closed up more than 3% to lead gainers in the Dow Jones industrials. Oracle (ORCL), Datadog (DDOG), and Autodesk (ADSK) closed up more than 2%, and Intuit (INTU) and Adobe Systems (ADBE) closed up more than 1%.
Mining stocks rallied on Friday amid the surge in gold and silver prices. Coeur Mining (CDE) closed up more than 10%, and Anglogold Ashanti (AU) closed up more than 9%. Newmont Corp (NEM) closed up more than 7%, and Hecla Mining (HL) closed up more than 6%. Barrick Mining (B) closed up more than 5%, Southern Copper (SCCO) closed up more than 3%, and Freeport McMoRan (FCX) closed up more than 2%.
Cybersecurity stocks are rallying today, led by a 5% jump in Cloudflare (NET) after better-than-expected quarterly earnings. Also, Zscaler (ZS), Okta (OKTA), and CrowdStrike Holdings (CRWD) closed up more than 3%, and Palo Alto Networks (PANW) closed up more than 1%.
Doximity (DOCS) closed up more than 31% after raising its 2027 revenue forecast to $671 million to $681 million from a previous forecast of $664 million to $676 million, which exceeded the consensus estimate of $672.8 million.
Twilio (TWLO) closed up more than 24% after boosting its full-year adjusted operating income forecast to $1.14 billion to $1.16 billion from a previous forecast of $1.04 billion to $1.06 billion, which was higher than the consensus of $1.10 billion.
Natera (NTRA) closed up more than 20% after raising its full-year revenue forecast to $2.85 billion to $2.91 billion from a previous forecast of $2.74 billion to $2.82 billion, which exceeded the consensus of $2.80 billion.
Airbnb (ABNB) closed up more than 17% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q2 revenue of $3.61 billion, which was above the consensus of $3.58 billion, and said it now expects full-year revenue growth to improve to “at least mid-teens,” up from previous expectations for “low- to mid-teens.”
Maplebear (CART) closed up more than 10% after reporting Q2 revenue of $1.04 billion, which was above the consensus of $1.03 billion, and forecasting Q3 gross transaction value of $10.30 billion to $10.55 billion, above the consensus of $10.27 billion.
Trade Desk (TTD) closed down more than 21% to lead losers in the S&P 500 after reporting Q2 revenue of $715 million, which was weaker than the consensus of $752.4 million, and forecasting Q3 revenue of $650 million, which was well below the consensus of $808.4 million.
Sweetgreen (SG) closed down more than 8% after cutting its full-year outlook and warning that diners are less willing to eat freshly prepared foods during the cyclospora outbreak.
ResMed (RMD) closed down more than 5% after reporting Q4 adjusted gross margin of 62.3%, below the consensus of 62.7%.
Monster Beverage (MNST) closed down more than 4% after reporting Q2 operating expenses of $679.2 million, which was well above the consensus of $596.3 million.
Fiserv (FISV) closed down more than 3% as analysts cut the price target on the stock by an average of 9.8% since the company reported earnings on Thursday.