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Market Snapshot: S&P 500, Nasdaq gains fade midday after hitting all-time highs as Treasury yields rise

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The S&P 500 index and Nasdaq Composite jumped to all-time highs Thursday after a round of upbeat earnings reports from tech heavyweights, but saw gains fade midday as Treasury yields rose and investors questioned how much good news is priced into the market.

Investors were also weighing dovish remarks made Wednesday by Federal Reserve Chairman Jerome Powell, President Joe Biden’s rollout of a $1.8 trillion package of additional government spending, and data showing the U.S. economy grew up 6.4% at annual rate in the first quarter.

What are major benchmarks doing?
  • The Dow Jones Industrial Average
    DJIA,
    -0.06%

    fell 14 points, or less than 0.1%, to 33,799, after flipping negative.
  • The S&P 500 SPX was roughly flat at 4,184, after trading at an intraday record of 4,218.78.
  • The Nasdaq Composite
    COMP,
    -0.58%

    was off 67 points, or 0.5%, to 13,981, near the session’s low, after hitting an all-time high at 14,211.57.

On Wednesday, stocks ended with small losses following the Fed meeting, after the S&P 500 notched an intraday record. The Dow fell 164. 55 points, or 0.5%, while the S&P 500 ended 0.1% lower and the Nasdaq Composite lost 0.3%.

What’s driving the market?

Corporate earnings remain strong, with Apple Inc.
AAPL,
-0.67%

and Facebook Inc.
FB,
+5.48%

delivering much stronger-than-expected results late Wednesday, offering a test to stocks that have failed to break out of a sideways trading range despite a robust earnings season.

The pullback from initial gains by tech heavyweights and the indexes is in keeping with the pattern seen over the course of earnings season, said Art Hogan, chief market strategist at National Securities, in a phone interview.

Stocks of companies that beat estimates haven’t seen outsize gains, while shares of companies that disappoint have seen outsize punishment, he noted, adding that such a pattern isn’t out of keeping with a backdrop in which stocks are trading near all-time highs.

Meanwhile, investors have largely ignored a consistent run of positive economic news, but will be likely to return their attention to prospects for an acceleration in growth this summer that is lifting expectations for future earnings growth, he said.

Thursday is the busiest day of the quarterly earnings reporting season, with roughly 11% of the S&P 500 index due to publish updates. Caterpillar, McDonald’s, Comcast and Merck reported before the market opened. Amazon and Twitter will post results after the market closes.

Currently about 86% of the S&P 500 companies that have reported beaten estimates, with earnings coming in 22.7% above expectations, according to data from Refinitiv. For revenue, 77% of companies have exceeded expectations.

Some analysts warned that a renewed rise in Treasury yields could spell trouble for stocks, particularly in the tech sector. Rising yields can be a headwind, particularly for growth oriented stocks, because they reduce the discounted value of future earnings. A rise in yields in March was credited with adding fuel to a rotation away from tech stocks and other highfliers into more cyclical stocks poised to benefit from the reopening of the economy. Yields have since pulled back, after rising to 14-month highs around 1.78%.

“This week’s steady but notable rise in Treasury yields could be weighing on U.S. equities and if Apple’s earnings beat is unable to set Wall Street alight, it doesn’t bode well for the rest of the earnings season,” said Raffi Boyadjian, senior investment analyst at XM, in a note.

Treasury yields slipped Wednesday afternoon after the Federal Reserve and Powell struck a dovish tone, but were rising again Thursday. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose 4.4 basis points to 1.667%.

Hogan said rising yields may be affecting stocks at the margins Thursday, but doubted they would spark a significant, renewed rotation from tech and other growth stocks into cyclicals unless the 10-year made a new cycle high.

Stocks edged higher during Powell’s news conference, with the S&P 500 hitting an all-time high, but ended the day slightly lower.

Read: Fed’s Powell ‘doesn’t blink,’ and 5 other things we learned from his press conference

“With no meaningful change to monetary policy or communication, this meeting was simply a message to market participants to sit back and observe as the economic recovery continues to unfold,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

“For now, the Fed is maintaining a tight grip on the bond market, but it appears like a discussion on tapering bond purchases is right around the corner,” he said, in emailed comments.

Late Wednesday Biden, in an address to a joint session of Congress, called for bigger government investment in the economy, including a $1.8 trillion proposal for additional spending on child care, education and paid leave partly offset by higher taxes on wealthy Americans.

Capitol Report: The word ‘jobs’ appeared more than 40 times in Biden’s first speech to Congress

In U.S. economic data, first-time jobless benefit claims fell to 553,000 last week from a revised 566,000 a week earlier, the Labor Department said Thursday. With revisions, the reading was the lowest level of claims since the pandemic struck last year.

Gross domestic product, the official scorecard for the U.S. economy, rose at a 6.4% annual pace in the first quarter, the government said Thursday.

 The data show that “the seeds of a virtuous cycle have clearly sprouted, but still have plenty of room for growth in the coming quarters,” said Jim Baird,  chief investment officer for Plante Moran Financial Advisors.

“Consumers are flush with cash and COVID fatigue has put them in the mood to spend.  We expect that they will,” he said.

Pending U.S. home sales rose 1.9% in March, less than expected, according to the National Association of Realtors, as prices surged and 30-year fixed rate mortgages edged higher from pandemic lows.

Which companies are in focus?
What are other markets doing?

The Ratings Game: Ford’s ‘massive’ first-quarter beat overshadowed by chip-shortage headwinds

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