Stocks React to Mixed Results: Microsoft Hits Record High, U.S. Steel Faces Merger Woes

Market volatility persists amid geopolitical concerns

• Economic strength postpones rate cuts, fostering uncertainty but fueling hopes for corporate earnings growth.
• Bond yields rise as robust PPI report surprises, signaling potential shifts in market dynamics.
• Market volatility persists amid geopolitical concerns, while stocks react to mixed corporate performances.

Thursday saw a downturn in stock markets, with both the S&P 500 and Nasdaq Composite experiencing a 0.3% decline, driven by a late afternoon selloff.

This reversal followed yet another robust economic report affirming the resilience of the economy. Earlier in the week, the consumer price index (CPI) had surpassed expectations, and on Thursday, it was the producer price index (PPI) that startled economists.

PPI prices surged by 0.6%, nearly double the forecast, while core PPI, excluding food and energy, rose by 0.3% compared to the anticipated 0.2%. Concurrently, February's retail sales increased by 0.6%, slightly below the forecast 0.8%.

The buoyant economic data has all but cemented expectations that the Federal Open Market Committee (FOMC) will maintain interest rates at their current level in the upcoming week's meeting.

Rate cut in May seems unlikely

The likelihood of a rate cut in May now stands at less than 9%, a stark contrast to initial expectations for a cut as early as next week at the start of the year. However, with each positive economic report, hopes for a rate reduction have been deferred, now extending to June at the earliest. This shift carries both positive and negative implications for stocks.

Initially, the anticipation of rate cuts fueled stock prices at the beginning of 2024. Consequently, the delay in rate reductions might be perceived as unfavorable for stocks.

Nevertheless, the robustness of the economy instills hope for double-digit corporate earnings growth this year, providing an alternate catalyst for stock market rallies. With first-quarter earnings nearing completion and tracking around a 3.5% increase, the trajectory of second-quarter earnings remains uncertain.

10-year rate at 4.30%

On Thursday, attention also gravitated toward bonds, with yields rising following the robust PPI report. The yield on the benchmark 10-year surged above 4.30%, albeit still below last year's high of 5%.

Meanwhile, bitcoin witnessed a substantial pullback from its Thursday intraday peak of nearly $74,000, trading at just over $67,000 in premarket, marking an 8% decline. Additionally, although the CBOE Volatility Index (VIX) closed higher by nearly 5%, it remains below its historical average.

New high for Microsoft

In the stock realm, Microsoft (MSFT) attained a new record closing high of $425.22, rising by just under 2.5%. Conversely, U.S. Steel (X) faced a significant setback, with its stock plummeting by nearly 6.5% amid mounting political concerns surrounding its planned merger with Japan's Nippon Steel (NPSCY).

Adobe (ADBE) and Ulta Beauty (ULTA) also made headlines, with Adobe shares plummeting by 11% in premarket trading following a weak sales outlook. Ulta shares dipped by 6% despite beating earnings estimates and raising its 2024 outlook, due to lowered comparable sales and operating margins forecasts.

Traders anticipate central bank meetings

Looking ahead to next week, minimal economic data or earnings announcements are scheduled. The focus will be primarily on central bank meetings, including the Federal Reserve, Bank of England, and Bank of Japan. Notably, there is speculation regarding a potential rate increase in Japan, marking the first since 2007.

For the present day, attention is drawn towards gold prices, particularly to observe if they conclude the week lower. Additionally, the occurrence of quadruple witching expiration, involving the quarterly expiration of various financial instruments, may introduce heightened volatility, warranting cautious trading. Amidst these fluctuations, adherence to investment plans and long-term objectives remains paramount.

Lastly, in the spirit of celebration, I extend warm wishes for a Happy St. Patrick's Day to all those partaking in the festivities!

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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