Stock Market Update

[BRIEFING.COM] The stock market retreated after an opening rally propelled the S&P 500 (-0.3%) and Nasdaq Composite (flat) to new record highs, with investors weighing a softer employment report against firmed rate cut expectations.

At its peak, the S&P 500 established an all-time high of 6,532.65, while the Nasdaq Composite set a record high around the same time at 21,878.81. Neither index would capture a record closing high, and the DJIA (-0.5%) trailed its counterparts for most of the session. 

Smaller-cap indices such as the Russell 2000 (+0.5%) and S&P Mid Cap 400 (+0.5%) outperformed the broader market, benefitting from the cemented rate cut expectations.

Today's Employment Situation Report added nuance to the market's outlook. August payrolls came in softer than expected, with nonfarm payrolls rising just 22,000 (Briefing.com consensus: 78,000), while private payrolls increased by just 38,000 (Briefing.com consensus: 90,000). The unemployment rate ticked just slightly up to 4.3%, and average hourly earnings grew 0.3%.

While the data signaled a cooling labor market, it reinforced expectations for rate cuts. The CME FedWatch Tool now assigns a 100% probability of a 25-basis-point cut at September's FOMC meeting, with a 10% chance of a 50-point move. Expectations for further 25-basis-point cuts remain strong, with a nearly 80% probability in October and a 70% probability in December.

Though today's data was the main mover of rate cut expectations, it is worth noting that the probability of a 50-basis point cut at the September FOMC meeting and October and December expectations did move modestly lower following some hawkish commentary from Chicago Fed President Austan Goolsbee (FOMC voter). Mr. Goolsbee stated in a Bloomberg interview that he has not made up his mind about a September rate cut, citing a need to control inflation before turning focus entirely to the labor market. 

While the opening advance was substantial, the broader market retreated sharply after an opening rally as investors engaged in some "sell the news" activity following the bolstered rate-cut outlook. Modest buying activity throughout the afternoon saw the major averages finish considerably above their session lows.

Six S&P 500 sectors ended the session lower, signaling that while monetary policy is supportive, concerns linger about the durability of economic growth and corporate earnings in a cooling environment.

Among the laggards, the financials sector (-1.8%) underperformed, as investors weighed the potential for weaker loan demand and tighter margins should economic conditions soften further.

The energy sector (-2.1%) was the top laggard, as crude oil futures settled today's session $1.59 lower (-2.5%) at $61.87 per barrel.

The real estate sector (+1.0%) finished as the best-performing sector, making up some losses from earlier in the week. 

Elsewhere, none of the other eight S&P 500 sectors closed with a gain or loss wider than 0.6%. 

On the earnings front, Broadcom (AVGO 334.89, +28.79, +9.41%) traded sharply higher after an impressive Q3 report, though the company's disclosure of an additional large AI partner (speculated to be OpenAI) weighed on competitors NVIDIA (NVDA 167.02, -4.64, -2.70%) and Advanced Micro Devices (AMD 151.14, -10.65, -6.58%). The PHLX Semiconductor Index finished with a 1.7% gain, while the broader technology sector retreated 0.2%. 

U.S. Treasuries finished the week on a strong note in the wake of today's employment data. The 2-year note yield settled down eight basis points to 3.51% (its lowest close in three years), and the 10-year note yield settled down nine basis points to 4.09%. 

• Nasdaq Composite: +12.4% YTD
• S&P 500: +10.2% YTD
• Russell 2000: +7.2% YTD
• DJIA: +6.7% YTD
• S&P Mid Cap 400: +5.6% YTD

Reviewing today's data:

• August Nonfarm Payrolls 22K (Briefing.com consensus 78K); Prior was revised to 79K from 73K, August Nonfarm Private Payrolls 38K (Briefing.com consensus 90K); Prior was revised to 77K from 83K, August Unemployment Rate 4.3% (Briefing.com consensus 4.3%); Prior 4.2%, August Avg. Hourly Earnings 0.3% (Briefing.com consensus 0.3%); Prior 0.3%, August Average Workweek 34.2 (Briefing.com consensus 34.3); Prior was revised to 34.2 from 34.3
  • The key takeaway is that the overall report leaned to the softer side of things, which isn't great economically speaking, yet, because it leaned that way, it also fortified the market's belief that there will be a rate cut at the September FOMC meeting and its hope that there will be additional rate cuts at the October and December FOMC meetings—a view that is supportive for a market pining for rate cut