Stocks Settle Higher as Soft-Landing Prospects Improve

Rich Asplund - Barchart - Thu Jan 25, 3:34PM CST

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed up +0.53%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.64%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.10%.

Stocks on Thursday closed moderately higher as signs of a resilient U.S. economy bolsters expectations that the Federal Reserve can engineer a soft landing. Thursday’s economic news showed U.S. Q4 GDP grew more than expected, powered by strength in consumer spending. Also, the Q4 core PCE price index was unchanged from Q3, signaling tame price pressures. In addition, weekly jobless claims rose more than expected, a dovish factor for Fed policy.

Some better-than-expected corporate earnings results also boosted stock index futures, with United Rentals closing up more than +12% after reporting stronger-than-expected Q4 revenue and forecasting 2024 revenue above consensus. Also, International Business Machines closed up more than +9% after reporting stronger-than-expected Q4 operating EPS.

Conversely, Tesla closed down more than -12% after reporting weaker-than-expected Q4 adjusted EPS and saying 2024 vehicle growth volume may be notably lower than 2023. Also, health insurers retreated, led by an -11% fall in Humana after forecasting 2024 adjusted EPS well below the consensus and saying it was withdrawing its 2025 earnings target.

U.S. weekly initial unemployment claims rose +25,000 to 214,000, showing a weaker labor market than expectations of 200,000.

U.S. Q4 GDP grew at a +3.3% (y/y annualized) pace, stronger than expectations of +2.0%. Q4 personal consumption grew +2.8%, stronger than expectations of +2.5%. The Q4 core PCE price index was unchanged at +2.0% from Q3, right on expectations.

U.S. Dec capital goods new orders ex-aircraft and parts, a proxy for capital spending, rose +0.3% m/m, stronger than expectations of +0.1% m/m.

U.S. Dec new home sales rose +8.0% m/m to 664,000, stronger than expectations of 649,000.

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 52% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields on Thursday moved lower. The 10-year T-note yield fell -4.8 bp to 4.109%. The 10-year German bund yield fell back from a 7-week high of 2.372% and finished down -5.2 bp at 2.290%. The 10-year UK gilt yield fell back from a 6-week high of 4.065% and finished down -2.7 bp at 3.983%.

The German Jan IFO business climate unexpectedly fell -1.1 to a 3-1/2 year low of 85.2, weaker than expectations of an increase to 86.6.

The ECB, as expected, kept its main refinancing rate unchanged at 4.50% and said the rate level must be maintained for a sufficiently long time to ensure inflation returns to 2% in a timely way.

ECB President Lagarde said, "The Eurozone economy is likely to have stagnated in the final quarter of 2023." She added, "The consensus around the table of the Governing Council was that it was premature to discuss rate cuts," and she stands by her recent comments that borrowing costs could be lowered in the summer.

Overseas stock markets on Thursday settled higher. The Euro Stoxx 50 closed up +0.40%. China’s Shanghai Composite Index closed up +3.03%. Japan’s Nikkei Stock Index closed up +0.03%.

Today’s stock movers…

United Rentals (URI) closed up more than +12% to lead gainers in the S&P 500 after reporting Q4 revenue of $3.73 billion, stronger than the consensus of $3.65 billion, and forecast 2024 revenue of $14.65 billion-$15.15 billion, the midpoint above the consensus of $14.8 billion.

American Airlines Group (AAL) closed up more than +10% after forecasting 2024 adjusted EPS of $2.25-$3.25, well above the consensus of $2.22. Other airline stocks rallied on the news, with United Airlines Holdings (UAL) closing up more than +5% and Delta Air Lines (DAL) closing up more than +4%.

International Business Machines (IBM) closed up more than +9% to lead gainers in the Dow Jones Industrials after reporting Q4 operating EPS of $3.87, above the consensus of $3.76.

ResMed (RMD) closed up more than +7% after reporting Q2 adjusted EPS of $1.88, stronger than the consensus of $1.79.

WR Berkley (WRB) closed up more than +7% after reporting Q4 net premiums written of $2.72 billion, better than the consensus of $2.67 billion.

Paramount Global (PARA) closed up more than +4% after Bloomberg reported that David Ellison made an offer to buy National Amusements, the holding company that controls 77% of the voting stock in Paramount.

Packaging Corp (PKG) closed up more than +3% after reporting Q4 net sales of $1.94 billion, stronger than the consensus of $1.89 billion.

Comcast (CMCSA) closed up more than +3% after reporting Q4 revenue of $31.25 billion, better than the consensus of $30.42 billion.

Tesla (TSLA) closed down more than -12% to lead losers in the S&P 500 and Nasdaq 100 after reporting Q4 adjusted EPS of 71 cents, below the consensus of 73 cents, and said 2024 vehicle growth volume might be notably lower than 2023.

Humana (HUM) closed down more than -11% to lead losers in the S&P 500 after forecasting 2024 adjusted EPS of about $16.00, well below the consensus of $29.18, and said it was withdrawing its 2025 earnings target. Other health insurers also fell on the news, with UnitedHealth Group (UNH) and Molina Healthcare (MOH) closing down more than -4%. Also, CVS Health (CVS), Cigna Group (CI), and Centene (CNC) closed down more than -2%.

Northrop Grumman (NOC) closed down more than -6% after forecasting 2024 sales of $40.80 billion-$41.20 billion, the midpoint below the consensus of $41.15 billion.

Boeing (BA) closed down more than -5% to lead losers in the Dow Jones Industrials after the U.S. Federal Aviation Administration (FAA) halted planned increases in production of Boeing’s 737 Max airliner.

Marsh & McLennan (MMC) closed down more than -3% after reporting Q4 organic revenue growth of +7.0%, weaker than the consensus of +7.86%

Southwest Airlines (LUV) closed down more than -2% after it forecasted Q1 costs per available seat mile, excluding fuel and special items, will climb +6% to +7%, y/y, higher than expectations of a flat forecast.

Across the markets…

March 10-year T-notes (ZNH24) on Thursday closed up +11 ticks, and the 10-year T-note yield fell by -4.8 bp to 4.128%. Mar T-notes on Thursday closed moderately higher on some Fed-friendly U.S. economic reports that showed weekly jobless claims rose more than expected, and the Q4 core PCE price index was unchanged. Decent demand for Thursday’s $41 billion auction of 7-year T-notes also supported T-note prices as the auction had a bid-to-cove ratio of 2.57, above the 10-auction average of 2.53.

Gains in T-notes were limited after U.S. Q4 GDP grew stronger than expected and Dec capital goods new orders ex-aircraft and parts rose more than expected, hawkish factors for Fed policy. Also, strength in stocks Thursday curbed safe-haven demand for T-notes.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.