U.S. stocks ended sharply higher on Friday and the S&P 500 registered an all-time closing high as strong earnings and a blowout January employment report boosted confidence in the economy, even while lowering the likelihood that the Federal Reserve will cut interest rates any time soon. The TSX ended lower, held back by weaker commodity prices, which came under pressure from a stronger U.S. dollar. Bond yields in both the U.S. and Canada rose sharply.
The rally on Wall Street capped a tumultuous week filled with high profile earnings, a Fed rate decision, and renewed jitters over regional banking weakness.
Solid quarterly results from Meta Platforms and Amazon.com helped boost the S&P 500 index and the Nasdaq Composite Index over 1%, while the blue-chip Dow Jones Industrial Average’s gain was more muted.
All three major U.S. stock indexes notched their fourth consecutive weekly gains.
“Earnings were strong for most companies this week, and we believe the Fed meeting was bullish because it properly set expectations for May or June rate cuts,” said Jay Hatfield, portfolio manager at InfraCap in New York.
The U.S. added 353,000 jobs in January, blasting past analysts’ estimates, while wage growth unexpectedly heated up, the Labor Department reported.
The added signs of economic vigor made it more likely that the U.S. central bank will delay cutting its key policy rate until much later than many had hoped. Fed Chair Jerome Powell on Wednesday pushed back against the notion of a March rate cut.
Financial markets are pricing in a 20.5% likelihood of a 25 basis point rate cut at the Fed’s March meeting, down from 69.6% a month ago, according to CME’s FedWatch tool.
“Looking ahead to the next few days, investors are laser focused on upcoming earnings and economic reports to identify more consistency in the data to gauge the extent and timing of Fed rate cuts,” said Greg Bassuk, chief executive officer of AXS Investments in New York.
Fourth-quarter earnings season is barreling along, with 230 of the companies in the S&P 500 having reported. Of those, 80% have come in above Wall Street expectations, according to LSEG.
On aggregate, analysts now see year-on-year S&P 500 earnings growth of 7.8% for the October-to-December period, a significant improvement over the 4.7% estimate as of Jan. 1.
Meta Platforms surged 20.3% to a record high after issuing its first dividend days ahead of the 20th anniversary of its Facebook unit.
Amazon.com jumped 7.9% following a fourth-quarter revenue beat as new generative artificial intelligence features in cloud and ecommerce businesses spurred robust growth during the year-end holidays.
Regional bank shares stabilized after two straight days of sharp sell-offs sparked by disappointing earnings from New York Community Bancorp. The bank’s stock rebounded on Friday, rising 5.0%, while the KBW Regional Banking index advanced 0.2%.
The S&P 500 climbed 1.07% to end the session at 4,958.61 points. The Nasdaq gained 1.74% to 15,628.95 points, while Dow Jones Industrial Average rose 0.35% to 38,654.42 points.
U.S. Treasury yields surged, with the 10-year Treasury yield marking its largest one-day advance since Sept. 2022.
“The bond market is having to reprice a lot of the rate cuts that were expected over the course of 2024 because job growth completely outperformed expectations,” said Lawrence Gillum, chief fixed income strategist for LPL Financial. “It’s been a pretty busy week with Fed meetings and Treasury announcements and regional bank concerns, but today’s jobs report is moving the market the most.”
The 10-year Treasury note yield was up 16.3 basis points to 4.026%, one day after reaching a new 2024 low. On the week, however, the 10-year was still down 29.7 basis points, the largest weekly decline since the week of Dec. 11.
Canadian bond yields were also sharply higher, with the closely watched five-year bond yield up 15 basis points.
Monetary policy in Canada is heavily influenced by the giant U.S. economy, and pricing in Canadian credit markets reacts to both domestic and U.S. economic data.
Implied interest rate probabilities in the swaps market, which capture bets for future monetary policy moves, now suggest only about a 25 per cent chance of a Bank of Canada rate cut at its April 10 meeting, down from 36 per cent prior the 0830 am ET jobs report. Earlier this week, prior to Canada releasing an unexpectedly strong gross domestic product reading, those odds were pegged at near 50-50.
A 69 per cent chance of a quarter-point interest rate cut is now priced in for the June 5 policy meeting, down from 82 per cent. The market is putting near-zero odds on a cut at the bank’s next meeting in March.
The market is still pricing in BoC cuts totaling nearly a full percentage point by year-end.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 34.12 points, or 0.2%, at 21,085.09. For the week, the index also lost 0.2%.
Gold fell 0.9% and oil settled 2.1% lower at US$72.28 a barrel. The materials sector, which includes precious and base metals miners and fertilizer companies, fell 1.9% and energy was down 2.2%.
The U.S. dollar index jumped to a seven-week high after the U.S. jobs report. Commodities are priced in the currency, so dollar appreciation works against their value.
The utilities and communication services indexes, which include high dividend-paying stocks that could particularly benefit from rate cuts, fell 0.6% and 1.2% respectively.
Technology was a bright spot, rallying 2.6%, as investors cheered the earnings of some high-growth U.S. companies.
Shares of e-commerce company Shopify added 8.9%.
Of the 11 S&P 500 sector indexes, six rose, led by communication services, up 4.69%, followed by a 2.49% gain in consumer discretionary.
Cigna rose 5.4% after the health insurance provider hiked its annual profit forecast.
Microchip Technology dropped 1.6% in the wake of the chipmaker’s disappointing sales forecast.
Footwear maker Skechers U.S.A also provided a downbeat forecast, sending its shares down 10.3%.
Oil supermajor Chevron Corp gained 2.9% after beating analyst estimates.
Declining stocks outnumbered rising ones within the S&P 500 by a 1.2-to-one ratio. The S&P 500 posted 68 new highs and four new lows; the Nasdaq recorded 75 new highs and 144 new lows.
Volume on U.S. exchanges was relatively light, with 11.2 billion shares traded, compared to an average of 11.6 billion shares over the previous 20 sessions.
Reuters, with reports from Darcy Keith of The Globe and Mail