Stock Market Update

[BRIEFING.COM] The S&P 500 (-0.5%), Nasdaq Composite (-0.5%), and DJIA (-0.3%) have steadied modestly beneath their flatlines after an early sell-off driven by mega-cap weakness and shifting rate cut expectations. The major averages are well off their session lows, supported by a rebound in the information technology sector to its flatline after an early loss wider than 1.0%.

This morning’s stronger-than-expected economic data weighed on the case for further policy easing, with the CME FedWatch tool now showing an 85.5% probability of a 25-basis point cut in October (from 91.9% yesterday) and a 63.5% probability of another cut in December (from 73.3%).

Comments from Kansas City Fed President Jeffrey Schmid (FOMC voting member) echoed that backdrop, calling policy “slightly restrictive,” which he noted is "where it needs to be." On the contrary, Fed Governor Stephen Miran (FOMC voting member) told Bloomberg that he still favors a proactive approach that would include a series of near-term rate cuts, adding to the market's uncertainty of the Fed's next steps after a widely expected 25-basis point cut earlier this month.

Dampened expectations for further easing have weighed on the small-cap Russell 2000 (-0.9%) and S&P Mid Cap 400 (-0.6%) today. Homebuilders are also under pressure, with the iShares U.S. Home Construction ETF (-1.0%) trading lower despite KB Home's (KBH 63.11, +0.73, +1.17%) earnings beat. 

Breadth figures capture the scope of today's retreat, with decliners outpacing advancers by a nearly 3-to-1 margin on the NYSE and Nasdaq.

Only the energy sector (+0.8%) currently trades above its flatline, though the information technology sector's (-0.2%) improvement has significantly narrowed losses at the index level.

Meanwhile, the health care sector (-1.8%) faces a loss in the majority of its components, and the consumer discretionary sector (-1.1%) suffers from a combination of mega-cap weakness in Tesla (TSLA 429.37, -13.42, -3.03%) and earnings weakness from CarMax (KMX 45.40, -11.65, -20.42%).

The Vanguard Mega Cap Growth ETF (-0.5%) has halved its earlier loss, with broader market weakness now contributing to the market-weighted S&P 500's (-0.5%) slight outperformance over the S&P 500 Equal Weighted Index (-0.7%). 

Overall, today's action reflects a market caught between strong economic underpinnings and reduced prospects for additional rate cuts, leaving investors cautious after a historic run to record highs.

Reviewing today's data:

• The third estimate for Q2 GDP was revised up to 3.8% (Briefing.com consensus: 3.3%) from the second estimate of 3.3%, spurred on by an upward revision to consumer spending. The GDP Price Deflator was revised up to 2.1% (Briefing.com consensus: 2.0%) from the second estimate of 2.0%.
  • The key takeaway from the report is that the consumer and the economy in aggregate were still operating in a solid state in Q2. Real final sales to private domestic purchasers were up 2.9% versus 1.9% in the second estimate.
• Weekly initial jobless claims for the week ending September 20 decreased by 14,000 to 218,000 (Briefing.com consensus: 238,000), while continuing jobless claims for the week ending September 13 decreased by 2,000 to 1.926 million.
  • The key takeaway from the report is the recognition that initial jobless claims—a leading indicator—are running at levels more consistent with a strong labor market than a weak one. If nothing else, there certainly wasn't a lot of firing activity in the week ending September 20.
• Durable goods orders increased 2.9% month-over-month in August (Briefing.com consensus: -0.5%) following an upwardly revised 2.7% decline (from -2.8%) in July. Excluding transportation, durable goods orders rose 0.4% month-over-month (Briefing.com consensus: -0.1%) following a downwardly revised 1.0% increase (from 1.1%) in July.
  • The key takeaway from the report is the nondefense capital good orders, excluding aircraft—a proxy for business spending—jumped 0.6% on the heels of a 0.8% increase in July.
• The Advance International Trade in Goods deficit narrowed to $85.5 billion from an upwardly revised $102.8 billion (from -$103.6 billion) in July. Advance Retail Inventories were flat following a downwardly revised 0.1% increase (from 0.2%) in July, and Advance Wholesale Inventories were down 0.2% following a downwardly revised unchanged reading (from 0.2%) in July.
  • The key takeaway from the report is that it had tariff policies written on it, evidenced by the fact that imports were $19.6 billion less than July imports, while exports were $2.3 billion less than July exports.
• Existing home sales dipped 0.2% month-over-month in August to a seasonally adjusted annual rate of 4.00 million (Briefing.com consensus 3.99 million) from an unrevised 4.01 million in July. Sales were up 1.8% on a year-over-year basis.
  • The key takeaway from the report is that home sales in August were still constrained by high prices, higher mortgage rates, and limited supply. The biggest month-over-month increase in sales was in the Midwest, which is also the region with the lowest median price (by a lot).