Stocks trim gains as big banks keep pushing lower

Stocks are ending the week with gains as the latest economic data reinforced bets the Federal Reserve will cut rates in September.

The S&P 500 rose Friday after a slide in the previous session. Tech megacaps rebounded and smaller firms kept climbing. Banks got hit at the start of the US earnings season, with results from Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. failing to fuel industry momentum.

Equity traders brushed off a weak reading on consumer sentiment to focus on prospects for rate cuts that could ultimately benefit Corporate America. Data also showed producer prices climbed slightly more than forecast – but categories used to calculate the Fed’s preferred inflation measure, the personal consumption expenditures price index, were not so bad.

“We continue to expect the Fed to join the global rate-cutting cycle in September, with 50 basis points of easing this year,” said Mark Haefele at UBS Global Wealth Management.

The S&P 500 rose to 5,620, It was set for a 10th weekly gain in 12 weeks. The Nasdaq 100 added almost 1%. The Dow Jones Industrial Average topped 40,000. Nvidia Corp. led gains in big tech. Tesla Inc. rallied a day after tumbling over 8%. The Russell 2000 of small caps was on track for its best week since November.

Wells Fargo sank 6% after warning it won’t be able to whittle away costs as fast as forecast. JPMorgan missed on a few key metrics like net interest income – despite posting record profit. Citigroup said costs for the year are likely to be at the high end of the range previously provided. Bank of New York Mellon Corp. jumped on better-than-expected NII.

As traders recalibrated their bets on rate cuts, Treasuries wiped out their 2024 losses this week. US 10-year yields declined three basis points to 4.18% on Friday.

“A critical risk, however, lies in financial conditions loosening – a development that is already contributing to our real-time tracking measures pointing to July inflation of 0.3% m/m for headline and core,” said Jose Torres at Interactive Brokers. “A continuation of these developments, which is my base case, will deter the Fed from dishing out its first cut of the cycle in September.”

To Krishna Guha at Evercore, the latest PPI release confirms June inflation is set to print very mild in the mid-teens month-on-month on the Fed’s preferred core PCE measure – putting US officials firmly on track to cut in September.

He also says this “new Fed phase” may sustain the stock-market breadth.

“We are now entering a new phase in which preemptive cuts (as opposed to reactive cuts driven by bigger rises in unemployment) can de-risk the forward growth outlook, he noted. “Provided the Fed is not moving too slowly to arrest the underlying weakening of the economy, this de-risking of the forward growth outlook favors market breadth and cyclical sectors.”

One of the biggest questions about the market rotation of the previous session – which notably improved breadth – is whether or not it is a legitimate trend reversal of the last year and half – or yet another head fake, according to Dan Wantrobski at Janney Montgomery Scott.

“We will say at the outset that as far as the technicals are concerned, it cannot be confirmed that yesterday’s action was the beginning of a sustainable longer-term trend,” he noted. “However, from a trading perspective, we do believe we can continue to see further rotation over the near term, as charts still point to the potential for mean reversion.”

One thing to keep in mind is that a “rotational” move is not the same as a “broadening out” move, according to Matt Maley at Miller Tabak.

“We believe a ‘rotational’ move will do the exact opposite of what it did when investors were ‘rotating’ into the tech sector in a big way over the past 20 months: It will drag the entire market lower with it – just like it has dragged the rest of the market higher with it since the fall of 2022,” he noted.

A highlight of this week was the big rebound in smaller firms – which have largely lagged the broader market and especially big tech names this year.

Quincy Krosby at LPL Financial says the Russell 2000 is viewed as an important barometer of potential interest-rate easing, but also a gauge for economic conditions.

“Historically, the Russell 2000 lags the market for three months following the first rate cut. The Fed normally cuts rates due to concerns about the economy and specifically the labor market,” Krosby noted. “The market would much prefer a rate cut predicated on inflation easing amid a solid economic landscape.”

The next few economic data points, in addition to earnings reports, should help clarify if small-cap performance is completely warranted, she concluded.

“Bulls withstood a barrage of data this week,” said Mark Hackett at Nationwide. “Market momentum remains relentless. Several important hurdles have been cleared, making earnings the next likely market catalyst.”

Corporate Highlights:

—AT&T Inc. said on Friday that hackers stole a cache of six months worth of mobile-phone customer data, disclosing for the first time a cybersecurity breach that was massive in its scope and potential risks to national security.

—Boeing Co. has notified some 737 Max customers in recent weeks that aircraft due for delivery in 2025 and 2026 face additional delays, another reminder that production of its cash-cow jetliner faces a long road to recovery.

—Amazon.com Inc.’s artificially intelligent shopping assistant, Rufus, is now available to all US customers following five months of testing with a subset of consumers.

—Deutsche Lufthansa AG cut its profit outlook for the full year and warned that breaking even at its namesake German unit will be “increasingly challenging” as it grapples with higher unit costs and falling ticket prices.

—Novo Nordisk A/S’s Ozempic was linked to lower rates of dementia and a range of other mental problems in a University of Oxford study that raises expectations about the diabetes drug’s potential ancillary benefits.

—Samsung Electronics Co.’s largest union is now calling on employees at one of the company’s most advanced AI memory chip plants to walk off the job, switching tactics after their campaign for higher pay showed signs of losing steam.

—Taiwan Semiconductor Manufacturing Co.’s $420 billion equity rally this year will get a valuation test next week when it reports earnings, with analysts expecting the chipmaker to raise full-year sales forecasts.

Some of the main moves in markets:

Stocks

—The S&P 500 rose 0.7% as of 3:45 p.m. New York time

—The Nasdaq 100 rose 0.8%

—The Dow Jones Industrial Average rose 0.8%

—The MSCI World Index rose 0.7%

Currencies

—The Bloomberg Dollar Spot Index fell 0.4%

—The euro rose 0.4% to $1.0907

—The British pound rose 0.5% to $1.2986

—The Japanese yen rose 0.6% to 157.81 per dollar

Cryptocurrencies

—Bitcoin rose 0.5% to $57,853.25

—Ether rose 0.4% to $3,128.53

Bonds

—The yield on 10-year Treasuries declined three basis points to 4.18%

—Germany’s 10-year yield advanced three basis points to 2.50%

—Britain’s 10-year yield advanced three basis points to 4.11%

Commodities

—West Texas Intermediate crude fell 0.5% to $82.22 a barrel

—Spot gold was little changed