Feeling better

There is some relative calm in the stock market this morning, which exited last week feeling better about the earnings outlook and the interest rate outlook. The former still looks higher for longer while the latter is being looked at again as maybe not higher for longer.

That’s a big maybe, but price trends support the thinking.

The 2-yr note yield, which is more sensitive to changes in the fed funds rate, has dropped 24 basis points since the FOMC decision last Wednesday to 4.79%. The CME FedWatch Tool, meanwhile, shows a heightened probability of two rate cuts — in September and December — before the end of the year, whereas it had been embracing the prospect of no rate cuts before the end of the year prior to the FOMC decision.

September fed fund futures show a 68.7% probability of a 25-basis points rate cut to 5.00-5.25% versus 55.5% a week ago. December fed funds futures show a 61.5% probability of a 25-basis points rate cut to 4.75-5.00% versus 42.8% a week ago.

This thinking has been supportive for follow-through buying interest after Friday’s post-employment, post-Apple (AAPL) earnings report rally, which took the Nasdaq Composite above its 50-day moving average and left the S&P 500 closing on the doorstep of its 50-day moving average (5,130).

The S&P 500 will be knocking on the door of that key technical level at today’s open and it will be let in. The question is, will it be allowed to stay?

Currently, the S&P 500 futures are up 21 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 59 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 159 points and are trading 0.4% above fair value.

The corporate news flow has shifted to a lower gear to begin the week. It will pick up as the week progresses with another large slate of earnings results.

Over the weekend, Berkshire Hathaway (BRK.B) reported Q1 results that featured a 39% year-over-year increase in operating profit. It didn’t escape notice either that Berkshire is sitting on roughly $190 billion in cash and that Warren Buffett said his succession plan calls for Greg Abel to manage Berkshire’s investment decisions. Shares of BRK.B are up 1.0%.

Vistra Corp. (VST) for its part is up 3.0% following the news that it will replace Pioneer Natural Resources (PXD) in the S&P 500 prior to the open on Wednesday, May 8. The biggest mover of the morning is small-cap company Perficient (PRFT), which is being acquired by an affiliate of BPEA Private Equity Fund VIII, part of EQT AB, for $76.00 per share in cash that represents a 75% premium to its closing price on April 29. PRFT is up 53%.

In other M&A news, Allete (ALE) is being acquired by a partnership led by Canada Pension Plan Investment Board and Global Infrastructure Partners for $67.00 per share in cash, or $6.2 billion including the assumption of debt.

Elsewhere, oil prices are creeping higher amid reports that Israel has told civilians to evacuate Rafah in what many think is a precursor to an eventual military invasion of the area. WTI crude futures are up 0.8% to $78.72/bbl and Brent crude future are up 0.6% to $83.48/bbl.

The market, therefore, might be feeling better about the earnings outlook and the interest rate outlook, but the geopolitical backdrop remains a challenge to say the least. For now, though, it is a backdrop issue, which is why there is a willingness by the market to turn its interest in the forefront to better earnings news and interest rate thoughts.

—

Originally Posted May 6, 2024 – Feeling better