Article originally published at 9:25 a.m. CT
JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Investors look to buy the dips in early trading
- Microsoft leads tech rally
- Fed holds rates steady but miffs investors
The markets look to be in recovery mode in early trading after Wednesday’s routing, which was triggered by a tech pullback and the Federal Reserve’s interest rate decision and press conference.
All three indices are tracking higher, with the Nasdaq Composite climbing 2.25%, regaining its footing after three days of declines put the index in official correction territory. The S&P 500 Index is gaining 1.17% while the Dow Jones Industrial Average, which got decreased significantly Wednesday, is higher by 0.66%.
The market had a harsh and swift reaction to the Federal Reserve’s decision to leave interest rates steady at 3.50% to 3.75%. The Dow was pushed down 2.19% at the close, or 1,153 points, marking its worst day in more than a year. The Nasdaq lost 1.74%, extending it three-day pullback and the S&P 500 gave up 1.52%.
Three dissenters wanted rates lifted 25 basis points – disagreement at that level is a very rare occurrence – underscoring growing pressure within the Federal Open Market Committee for a move to tame inflation. But investors appeared to be mostly miffed by Chairman Kevin Warsh’s bearish remarks about bonds and inflation risk, sparking the late-day selloff. The yield on the 30-year Treasury is at 6.78% in early trading, its highest level since 2007.
The CME FedWatch tool is now leaning nearly 60% toward a rate hike to 3.75% to 4% in September.
As for the stock slump yesterday, we’ve seen this play out before. Initial market reaction can sometimes be amplified, but investors tend to calm down after thinking it through and then buying on the dip. The challenge today is to see if the market can he hold on to this upward movement.
Microsoft and Meta shares are moving in opposite directions after the two reported mixed earnings late Wednesday tied to artificial intelligence spending and potential returns.
Microsoft shares are driving a tech rally, rising nearly 10% after strong second-quarter results looked to reassure investors that its AI investment is starting to pay off. Microsoft’s Azure cloud business – a major revenue-generator – grew 43% in the fiscal fourth quarter, outpacing Wall Street’s expectations and helping to boost the tech giant’s robust results. For the fiscal year, which ended in June, the company said Azure sales passed $100 billion for the first time, marking its fastest growth rate in four years. Its AI-enabled CoPilot gained 10 million new paid users on a year-over-year basis for a total of 30 million.
Meta shares were losing nearly 10% in early trading, extending its losses, after the social-media giant reported record revenues but missed on profits and offered soft third-quarter guidance late yesterday. Investors seemed to focus on free cash flow, which dropped by 91% to $784 million in the quarter compared with the more than $8.5 billion a year earlier, a sign that artificial intelligence spending was a cash-drag on results. Meta then raised the lower end of its capital expenditure spending to $130 billion from $125 billion, keeping the higher end at $145 billion untouched.
Lam Research’s earning report also gave investors hope the heavy AI spending might be worth it. The semiconductor vendor reported earnings that far outweighed Wall Street’s expectations linked to strong demand for chips. Lam also lifted its profit forecast, noting it expects gross margins at 52%. Shares were up 19% in early trading.
Starbucks shares are moving about 5% to the upside after the coffee giant reported earnings late Thursday that easily beat Wall Street’s expectations and raised its outlook. Sales at stores open more than a year, a key restaurant metric, climbed 7.9% worldwide and 8.1% in North America as the café chain continues its turnaround efforts.
Yum Brand shares are moving 4.6% higher after the Taco Bell and KFC parent company released second-quarter results that were better than Wall Street’s expectations for per-share profits but fell short on revenue. The results were calculated before the cyclospora outbreak, which was tied to lettuce at Taco Bell. That has reportedly led to a notable drop in foot traffic at the Mexican-inspired fast-food chain. Yum’s results included Pizza Hut’s numbers before it was sold last month.
Crude oil prices are trending 1% lower after a huge step forward yesterday, prompted by renewed conflict in the Middle East. WTI Crude Oil prices were down 1.04% to the mid-$83 range.
Investors will set their sights on Apple and Amazon earnings results after the bell. Apple investors will be looking for whether the recent device price hikes are offsetting costs and how iPhone sales are going. It also will mark Chief Executive Tim Cook’s final earnings call before he moves to chairman of the board Sept. 1.
Amazon investors want to see how the AWS cloud growth rolls in as well as the results of Prime Day in June. AI investment, which is standing at a staggering $200 billion, also will be top of mind.
Happy trading!
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