Stocks rallied ahead of tomorrow's key reading on consumer inflation as market participants ramped up bets that the Federal Reserve would embrace a more gradual approach to lowering borrowing costs. Mega-cap tech names once again led the charge, but one of the sector's most important stocks failed to take part.
Stocks are extending their already impressive yearly gains ahead of the release of the next Consumer Price Index (CPI) report, writes José Torres, senior economist at Interactive Brokers. "Investors are also gearing up for earnings season, which kicks off this Friday, and folks are eager to hear about last quarter's profits and the outlook for profitability," the economist adds.
A blowout September jobs report has market participants frantically recalibrating their bets on how fast the Federal Reserve will normalize borrowing costs. As recently as last week, futures traders assigned a 35% probability to the Federal Open Market Committee cutting the short term federal funds rate by 50 basis points (bps), or 0.50%, at the next Fed meeting. As of October 9, odds of a 50 bps cut stood at 0%.
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Meanwhile, odds of a quarter-point cut fell to 76% from 85% a day ago, according to CME Group's FedWatch Tool. Chances for the FOMC to leave rates unchanged rose to 24% from 15% the day prior.
"Rate watchers have removed another 50-basis point reduction from the table in November, favoring a 25, while also considering a pause that now sports odds of 15%," Torres notes.
A data-dependent Fed will certainly take tomorrow's CPI report into heavy consideration as it formulates interest rate policy. "I'm anticipating that shelter, food, medical care, transportation services and automobiles support price pressures while costs for gasoline, energy services (electricity and heating) and apparel offer relief to households," writes Torres.
Market participants on Tuesday also digested minutes from the last FOMC meeting and tuned into another slew of Fed speakers. Lorie Logan, president of the Federal Reserve Bank of Dallas, said she favors a slower path of rate cuts as the central bank brings borrowing costs down from a 23-year high.
At the closing bell, the broader S&P 500 added 0.7% to 5,792, an all-time closing high. The blue-chip Dow Jones Industrial Average also notched another record close, rising more than 1% to 42,512. The tech-heavy Nasdaq Composite gained 0.6% to 18,291.
Stocks in focus
Tesla (TSLA, -1.4%) stock wavered around breakeven for much of the session ahead of the electric vehicle (EV) maker's much anticipated robotaxi event slated for Thursday. Investors hope the highly hyped unveiling will create another catalyst to drive TSLA stock higher.
The event known as "We, Robot" will give Wall Street its first look at the Tesla Cybercab prototype and the platform that owners and riders will use to book rides. In addition, Tesla is expected to release an update to its Full Self-Driving (FSD) technology, which will enable the robotaxis to function, as well as a timeline to the production of the Cybercab and the launch of the service.
However, some analysts on Wall Street think Tesla is simply playing catch-up at this point. "While Tesla is clearly focused on launching a robotaxi, Waymo and Cruise are already operating robotaxis in the U.S. today," writes Bernstein analyst Toni Sacconaghi Jr. "The available data is clearly imperfect, but as of today Tesla appears to be lagging behind the leaders in the space."
Sacconaghi adds that Waymo, which is owned by Google's parent company Alphabet (GOOGL), has been working with regulators on its self-driving cars for over 10 years, while Tesla has yet to begin the process.
Alphabet slides on antitrust jitters
Speaking of Alphabet, the Google parent saw its stock fall 1.3% Wednesday after a legal filing revealed that the Department of Justice is considering a bid to break up the mega-cap tech name on antitrust grounds.
According to a Justice Department filing, the agency is "considering behavioral and structural remedies that would prevent Google from using products such as Chrome, Play, and Android to advantage Google search and Google search-related products and features."
Although Wednesday's price action wiped out $32 billion in market cap – or the equivalent of the entire market value of Delta Air Lines (DAL) – analysts say it will take years for the antitrust actions to play out in court. And while the DoJ creates something of an overhang for the Magnificent 7 stock, Wall Street remains abundantly bullish on the name. Of the 63 analysts covering GOOGL surveyed by S&P Global Market Intelligence, 35 rate it at Strong Buy, 15 call it a Buy and 13 say it's a Hold. That works out to a consensus recommendation or Buy with high conviction.
Speaking for the bulls, Oppenheimer analyst Jason Helfstein says that although the DoJ situation "creates uncertainty," increased monetization of YouTube, increased monetization of Android and continuing share repurchases are just a few of the catalysts supporting his Outperform (Buy) rating.
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