Categories: Economic News

Wall Street’s rally is ‘somewhat irrational’ as solid earnings and economic data raise hopes for yet-unlikely Fed ‘pivot’

Technology stocks led a broad rally on Wall Street on Friday, capping another strong week for the market as investors welcomed solid earnings from Apple and other companies.

The S&P 500 rose 2.5% and posted its first consecutive weekly gains since August. The Dow Jones Industrial Average rose 2.6% and the Nasdaq, a technology composite, rose 2.9%. Shares of smaller companies also gained ground, with the Russell 2000 index up 2.3%.

Apple’s latest quarterly results showed the iPhone maker made even bigger profits over the summer than expected. Its shares rose 7.6%, leading a rally in tech stocks that had been largely outperformed a day earlier.

Intel rose 10.7 percent after posting much bigger profit than analysts expected, although it said it saw “deteriorating economic conditions.”

Gilead Sciences rose 12.9% and T-Mobile US gained 7.4% after they also beat Wall Street profit expectations.

Investors were also cheered by a report on consumer spending that came a day after new data showed the economy grew modestly in the third quarter and inflation eased.

“You have an economy that almost refuses to collapse, an economy that at its core is resilient, but at the same time inflation is coming down and that’s what the Fed wants and that’s obviously what the market wants ” said Quincy Krosby, Sr. equity strategist for LPL Financial.

That has helped fuel hopes on Wall Street of a “pivot” from the Federal Reserve, where the central bank scales back the big interest rate hikes that have roiled the market. That move could boost the market, though many analysts say those hopes may be overblown.

Fed hopes pivot prematurely

The central bank has been very clear about its plan to err on the side of going too far to control inflation, meaning big gains on hopes of a pullback look premature, said Liz Young, strategist at SoFi Chief Investments.

“This rally has become a bit irrational and fragile at this level,” Young said.

The S&P 500 rose 93.76 points to 3,901.06. The Dow gained 828.52 points to 32,861.80. The Nasdaq rose 309.78 points to 11,102.45. The Russell 2000 gained 40.60 points to 1,846.92.

Many large US companies have been reporting stronger-than-expected earnings, although the stock market remains decidedly mixed.

Friday’s solid earnings helped offset a 6.8% drop in Amazon, which delivered a weaker-than-expected revenue forecast. It was the latest Big Tech company to take a beating this week after reporting some discouraging trends. It’s a sharp turnaround after the group dominated Wall Street for years with seemingly unstoppable growth.

Earlier in the week, Meta Platforms lost nearly a quarter of its value after reporting a second straight quarter of declining revenue amid falling advertising sales and stiff competition from TikTok. Microsoft and parent company Google also reported slowdowns in key areas.

Those issues have created a stark divide on Wall Street this week, between Big Tech laggards and the rest of the market. The Nasdaq, which is loaded with high-growth tech stocks, posted a 2.2% gain this week. It would have had an even worse showing if not for Apple’s push starting Friday. The Dow, meanwhile, rose 5.7% for the week as it puts less emphasis on technology.

Rising interest rates have hit Big Tech share prices harder than the rest of the market, with pressure mounting on Friday as yields rose.

“Markets still don’t want to believe that we could end up in a place where an earnings recession is possible,” Young said.

Intentional slowdown of the economy

Data released this morning showed that wage increases and other compensation for US workers over the summer were in line with economists’ expectations. That should keep the Fed on track to keep raising rates sharply in hopes of weakening the labor market enough to undercut the nation’s high inflation. Other data showed that the Fed’s preferred measure of inflation remains very high and US households continue to spend more to deal with it.

The Fed is trying to quell inflation from the purchases by households and businesses needed to keep it high. It is doing this by intentionally slowing down the economy and the job market. The concern is that it could go too far and cause a sharp fall.

The Fed has already raised its benchmark overnight interest rate to a range of 3% to 3.25% from virtually zero in March. It is widely expected to push for another increase of three times its usual size next week, before potentially making a smaller increase in December. Higher rates not only slow the economy, but also hurt stock prices and other investments.

The two-year Treasury yield, which tends to track expectations for Fed action, rose to 4.42% from 4.28% late Thursday.

The 10-year yield, which helps set rates on mortgages and many other loans, rose from 3.93% to 4.01%.

Trading in Twitter shares has ended, after Elon Musk took control of the company after a long legal battle.

—Associated Press writers Elaine Kurtenbach, Matt Ott and Mari Yamaguchi contributed.

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