Market Rebounds on Positive Economic Reports and Strong Earnings

The S&P 500 Index ($SPX) (SPY) closed up +1.83% on Wednesday, while the Dow Jones Industrials Index ($DOWI) (DIA) rose by +1.65%. The Nasdaq 100 Index ($IUXX) (QQQ) increased by +2.31%. March E-mini S&P futures (ESH25) are up +1.80%, and March E-mini Nasdaq futures (NQH25) have climbed +2.20%.

Stocks Surge Following Positive Inflation Data

On Wednesday, stocks experienced a strong rally. The S&P 500 and Nasdaq 100 reached one-week highs, while the Dow Jones Industrials marked its highest point in two-and-a-half weeks. The surge in stock prices coincided with a decline in bond yields after a consumer price report indicated an unexpected slowdown in core inflation for December. This news sparked speculation about the possibility of interest rate cuts from the Federal Reserve later this year. Additional gains were noted in the afternoon, following an upbeat Fed Beige Book report which stated that economic activity in the U.S. increased “slightly to moderately” in late November and December.

Strong Bank Earnings Fuel Market Optimism

The overall market was further bolstered by better-than-expected quarterly earnings from major U.S. banks. Citigroup, JPMorgan Chase, Blackrock, Goldman Sachs, Bank of New York Mellon, and Wells Fargo all exceeded analysts’ consensus estimates.

Mortgage Applications and Consumer Prices Show Mixed Signals

In other financial news, U.S. MBA mortgage applications surged by +33.3% for the week ending January 10, with the purchase sub-index rising by +26.9% and the refinancing index increasing by +43.5%. However, the average 30-year fixed-rate mortgage rate did rise by 10 basis points to an eight-month high of 7.09%, up from 6.99% the previous week.

Consumer Price Index Reflects Inflation Trends

The U.S. Consumer Price Index (CPI) for December saw a year-over-year rise to +2.9%, up from +2.7% in November, matching expectations. Notably, the core CPI, excluding food and energy, unexpectedly eased to +3.2% year-over-year, down from +3.3% in November, surpassing forecasts of no change.

Manufacturing Survey Indicates Economic Weakness

Contrasting with the positive consumer data, the January Empire manufacturing survey revealed an unexpected drop of -14.7, landing at an 8-month low of -12.6 and falling short of anticipated growth.

Fed Comments Hint at Continued Restriction

Fed officials’ comments were slightly hawkish, leading to a bearish outlook for stocks. New York Fed President John Williams noted, “The process of disinflation remains in train,” but emphasized that the 2% inflation goal has not been reached. Additionally, Richmond Fed President Thomas Barkin expressed that demand in the economy is solid, supporting the need for a restrictive approach to achieve the inflation target.

Focus on Upcoming Retail Sales Data

Investors are looking ahead to Thursday’s U.S. retail sales report, which is expected to show a monthly increase of +0.6% for December. Earnings season has also kicked off, with analysts anticipating a 7.5% growth in S&P 500 earnings for Q4, marking the second-highest pre-season forecast in three years.

Global Market Trends Show Mixed Results

Overseas markets presented mixed results; the Euro Stoxx 50 closed up +1.04%, while China’s Shanghai Composite Index fell by -0.43%. Japan’s Nikkei Stock 225 experienced a slight decline, down -0.08%.

Interest Rates and Bonds

On the bond market front, March 10-year T-notes (ZNH25) rose +31 ticks, and the yield on 10-year T-notes decreased by -13.5 basis points to 4.657%. This rally followed the December core CPI’s smaller-than-expected rise. Furthermore, signs of weakness in U.S. economic activity emerged from the manufacturing survey data, pushing T-notes to gain support from recent rallies in European bonds.

International Bond Markets Reflect Easing Trends

European government bond yields fell sharply, with the 10-year German bund yield dropping -9.2 basis points to 2.560%, while the 10-year UK gilt yield decreased -15.9 basis points to 4.731%. The Eurozone November industrial production met expectations with a +0.2% month-over-month increase.

UK Inflation Data and ECB Rate Outlook

In the UK, December’s CPI unexpectedly eased to +2.5% year-over-year from +2.6% in November, better than expectations. Core CPI also decreased to +3.2% from +3.5%. Swaps are currently discounting a 99% probability of a -25 basis point rate cut by the ECB at its upcoming policy meeting on January 30.

Notable Stock Movements

In the stock market, megacap technology stocks drove the overall market with substantial gains. Tesla (TSLA) led with an increase of more than +8%, followed by Alphabet (GOOGL), Nvidia (NVDA), and Meta Platforms (META), all closing up over +3%. Additionally, Microsoft (MSFT), Amazon.com (AMZN), and Netflix (NFLX) all posted gains exceeding +2%.

Strong Performances from Financial Sector

Intuitive Surgical (ISRG) jumped over +7% following a preliminary Q4 revenue report of $2.41 billion, surpassing expectations. Bank of New York Mellon (BK) rose by more than +8% after reporting Q4 net interest revenue of $1.19 billion, above the consensus estimate.

Goldman Sachs (GS) saw a gain of more than +6% after reporting Q4 net revenue of $13.87 billion, significantly above the consensus of $12.37 billion. Wells Fargo (WFC) and Citigroup (C) also closed up by more than +6%, exceeding earnings expectations.

Market Reactions and Underperformers

Home builders and suppliers experienced a rally thanks to falling T-note yields, with Builders FirstSource (BLDR) closing up more than +4%. Still, Keros Therapeutics (KROS) suffered a significant loss, closing down more than -16% after halting a Phase 2 trial of a lung disorder therapy due to side effects.

Market dynamics affected defensive stocks negatively, with pharmaceutical companies like Viatris (VTRS) and AbbVie (ABBV) closing down more than -2%. Additionally, Paramount Global (PARA) saw a decline after a federal review was called for regarding its merger with Skydance Media.

Upcoming Earnings Reports

Investors should take note of upcoming earnings reports on January 16, 2025, from Bank of America Corp (BAC), JB Hunt Transport Services Inc (JBHT), M&T Bank Corp (MTB), Morgan Stanley (MS), PNC Financial Services Group I (PNC), UnitedHealth Group Inc (UNH), and US Bancorp (USB).

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information please view the Barchart Disclosure Policy here. More news from Barchart

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.