June 10, 2023

Stocks closed higher on Wall Street Friday, establishing the market’s third winning week of the last four and sending the S&P 500 index to its highest levels since summer.

The S&P 500 rose 0.2% Friday to 4,070, while the Nasdaq composite climbed 0.9% and the Dow ended up about 0.1%. The gain in the S&P 500 puts the index back at its level in late August. 

Investors were cheered by a Friday report showing that inflation is continuing to cool, raising hopes for a smaller interest rate increase from the Federal Reserve next week. Meanwhile, earnings reporting season is in full swing, and companies have been offering mixed results and forecasts. That’s created some big swings in markets.

On Friday, American Express helped lead the way. It jumped after giving a profit forecast that topped expectations.

With the Fed slated to announce its next rate hike on February 1, next week could be even busier for markets.

“Next week’s earnings calendar, coupled with the Fed meeting, and followed by the payroll report are crucial to see if the market can cross and hold the key 4,100 technical level,” noted Quincy Krosby, chief global strategist for LPL Financial, in a research note.

A big gain for Tesla’s stock also supported the market on Friday. It rose 12.1% following its stronger-than-expected profit report for the end of 2022 released earlier in the week.

Such gains helped offset a steep loss for Intel following a jolting warning from the chipmaker. Not only did its revenue and earnings fall short of expectations last quarter amid a punishing slowdown in sales, it also gave a forecast for revenue this quarter that was more than $2 billion short of analysts’ expectations. Intel dropped 6.8%.

Hasbro fell 7.5% after saying it “underperformed” in this past holiday shopping season and will likely report a 17% drop in revenue for the fourth quarter. The company plans to cut about 1,000 jobs to reduce costs.

High-profile layoffs

So far, the job market has remained remarkably resilient despite a slowing overall economy. Almost all of the high-profile layoff announcements have been within the tech industry, which raced to expand after the pandemic sent demand for technology soaring. But layoffs may be starting to spread to other industries.

Two competing big ideas have been sending Wall Street veering up, down and back again recently. On one hand are worries about a steep drop-off in profits and a severe recession for the economy following all the Federal Reserve’s increases to interest rates last year. On the other are hopes that cooling inflation may allow the Fed to take it easier on rates.

The market is partly trying to reconcile that weak earnings and a drop in demand may be necessary for inflation to keep cooling, said Keith Buchanan, portfolio manager at Globalt Investments.

“It’s kind of like this is the medicine the economy has to take,” he said.

Friday’s release of the inflation measure that the Fed prefers showed that prices minus food and energy costs were 4.4% higher in December than a year earlier. That was down from 4.7% inflation in November and was equal to economists’ expectations.

More broadly, inflation slowed to 5% in December from a year earlier, down from 5.5% in November, according to the personal consumption expenditures price index.

Reports also showed that income growth for Americans slowed in December, while consumer spending fell off a bit more sharply than expected.

Inflation expectations

A separate report said U.S. consumers are also downshifting their expectations for inflation in the coming year. Over the long run, the University of Michigan said inflation expectations among consumers remain roughly where they’ve been for most of the last 18 months.

Keeping such expectations anchored is key for the Fed, which wants to avoid a vicious cycle where households expecting high inflation make moves that only make it worse.

Economists said Friday’s data likely keeps the Fed on track to raise its key benchmark rate by 0.25 percentage points at its meeting next week. That would be a step down from its increase of 0.50 points last month and four straight hikes of 0.75 points before that.

Smaller increases would mean less added pressure on the economy, which has already seen damage done to the housing industry and other areas because of last year’s surge in rates.

The yield on the 10-year Treasury, which sets rates for mortgages and other important loans, ticked up to 3.52% from 3.51% late Thursday. The two-year yield, which moves more on expectations for Fed actions, rose to 4.21% from 4.19%.

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