Tech Extends Rally

U.S. stocks ended the week broadly higher, thanks to growing optimism about a debt-ceiling deal and a string of strong earnings reports from microchip makers that delivered a fifth straight weekly gain for the Nasdaq Composite, leaving it at a nine-month high.

As of Friday afternoon, White House and congressional negotiators appeared to be closing in on an agreement to raise the debt ceiling for two years, according to numerous media reports. Word of the apparent progress so close to the Treasury's June 1 deadline appeared to cheer the market Friday.

Meanwhile, the tech sector enjoyed another day in the lead after Marvell Technology (MRVL) on Thursday evening became the latest semiconductor company to report stronger-than-expected quarterly results, adding more fuel to the latest tech rally ignited by Nvidia's (NVDA) recent blockbuster earnings report.

The market entered the long holiday weekend on a high note despite a hotter-than-expected Personal Consumption Expenditures (PCE) report released earlier Friday, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

However, this burst of good feelings shouldn't distract investors from the many potential risks that lie ahead: Tech's recent outsized gains could leave the sector exposed to a pullback, Nathan says, noting that we appear to have "two different markets," characterized by the biggest companies driving the gains, while smaller firms lag behind.

And then there's our "relatively sticky" macro environment of high inflation and elevated interest rates, he says, adding that the May employment report next Friday could be revealing.

Here is where the major benchmarks ended:

The S&P 500® Index was up 54.17 points (1.3%) at 4205.45; the Dow Jones industrial average was up 328.69 (1.0%) at 33,093.34; the Nasdaq Composite was up 277.59 (2.2%) at 12,975.69.
The 10-year Treasury yield was little changed at 3.81%.
Cboe's Volatility Index was down 1.22 at 17.93.

Tech remains the runaway upside leader among sectors, with the Philadelphia Semiconductor index soaring over 6% to a 14-month high Friday. The Nasdaq-100 also ended near a 14-month high. Communications services and real estate were also strong. Oilfield services and other energy companies were among the weakest sectors, despite a jump of more than 1% in crude oil futures.

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Stocks on the move

The following companies had large, news-driven stock price moves or reported results over the past day:

American Express (AXP) shares rose after Morgan Stanley said a recent sell-off was "overdone" and with the stock trading at its cheapest level in years, it's a good entry point for investors. American Express shares rose 4.2%.
Ford (F) announced a partnership with Tesla (TSLA) late Thursday that will give Ford owners access to more than 12,000 Tesla Superchargers in the U.S. and Canada. Ford shares rose 6.3% and Tesla shares rose nearly 5%.
Gap (GPS) late Thursday reported a net quarterly loss and a drop in sales, but the market cheered an improvement in margins. Its shares rose almost 12.5%.
Marvell Technology earnings topped analyst expectations, and the company said it expects revenue growth to accelerate in the second half of the year, with CEO Matt Murphy citing artificial intelligence as a "key growth driver." Its shares jumped 32%.
Paramount (PARA) shares rose after National Amusements, Paramount's majority voting shareholder, announced a $125 million preferred equity investment by BDT Capital Partners. Loop Capital upgraded Paramount to a "hold" rating from a "sell." Paramount's shares rose 6.2%.
RH (RH) reported quarterly guidance that fell short of analysts' expectations and warned of increased markdowns, though the company formerly known as Restoration Hardware surpassed estimates for first-quarter adjusted earnings per share and revenue. Its shares were down about 3%.
Ulta Beauty (ULTA) reported earnings and revenue that surpassed expectations but also a less optimistic operating margin outlook. Shares of the makeup retailer fell 13%.
Workday (WDAY) reported earnings and revenue that topped analysts' expectations and raised the low end of its full-year subscription revenue guidance. Shares of the software company rose 10%.

With 96% of S&P 500 results in for the recently concluded quarter, average earnings per share and revenue growth were both well above expectations. Additionally, the magnitude of the average "beat" was larger than that of any of the last four quarters, suggesting analysts may have placed the expectations bar too low heading into the season.

Red flag for bulls?

The past week extended a theme that's persisted for much of 2023, with the largest-capitalization stocks responsible for the lion's share of the gains in benchmarks such as the S&P 500, while small-cap companies have largely stayed still, Nathan says. That may reflect expectations that smaller companies are more susceptible to recession pressure than larger counterparts.

For example, the S&P 500 index is up 9.5% so far this year, while the S&P 500 Equal-Weight is flat and the smaller-cap Russell 2000 is up just 0.6%.

"That isn't a great sign for the bulls," Nathan says, noting that the S&P 500 is "fully valued" with a forward price-to-earnings ratio of 19, above its 10-year average of 16.9. That said, tech stocks also appear to be benefitting from an AI-driven multiple re-rating.

Data and the Fed

Early Friday, the government said Personal Consumption Expenditures (PCE) prices rose 0.4% in April, slightly higher than the 0.3% analysts had expected. Core PCE prices, which strip out food and energy, also rose 0.4%. PCE prices are closely watched by the Federal Reserve, and the latest numbers suggest inflation remains stubbornly hotter than expectations and may fuel renewed concerns over additional rate hikes in upcoming Federal Open Market Committee (FOMC) meetings.

Core PCE is now up 4.7% year-over-year. It's been 0.3% or higher month-over-month in each of the first four months of 2023, with no real sign of slowing. Also Friday, it was reported that April Personal Spending rose 0.8% versus expectations on Wall Street for an increase of 0.4%.

Recent inflation data, combined with hawkish comments from Fed officials, have prompted investors to sharply scale back expectations the central bank will take a "pause" in its year-long rate hiking path, and market watchers have growing expectations the Fed may in fact increase rates next month.

Late Thursday, the odds of the Fed leaving rates unchanged at its June 13–14 policy meeting were just 34%, down from 83% a week ago, according to the CME FedWatch tool.

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