Closing Market Update: Month Ends on Weak Note

The ongoing debt-ceiling drama and a stronger-than-expected jobs report weighed on stocks Wednesday, with the S&P 500^® Index and Nasdaq Composite indexes both dropping for first time in four days.

The House of Representatives was preparing to vote late Wednesday on the debt-ceiling deal brokered by House Speaker Kevin McCarthy and the White House. Passage would release the legislation to the Senate for a further vote. While many expected a deal to be struck eventually, the approach of the Treasury's June 5 default deadline remains a source of market uncertainty.

"The bottom line is that Congress will get this done," says Michael Townsend, managing director of legislative and regulatory affairs at Schwab. "We expect the House to pass the bill tonight and the Senate over the weekend. Once President Biden signs it into law, Treasury can begin borrowing again and market concerns about a possible default will fade away."

"The deal reached over the holiday weekend will suspend the debt ceiling until January 1, 2025, at which time the Treasury will be able to use its 'extraordinary measures' for several more months," Mike adds. "That means the debt ceiling won't have to be dealt with again until mid-2025—well after the 2024 elections and when a new Congress is in place."

Also Wednesday, a job openings report showed its first increase since December, "continuing a string of recent employment metrics indicating little to no deterioration on the labor front," says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

He adds that a recent string of surprisingly strong economic reports has deflated expectations the Federal Reserve had reached the end of its anti-inflationary rate-hiking cycle, and many investors now expect the Fed to raise rates again at its upcoming June meeting. May payroll numbers, which are due to be released Friday, could further shape expectations for the Fed's next move.

Here is where the major benchmarks ended:

• The S&P 500 Index was down 25.69 points (0.6%) at 4179.83; the Dow Jones industrial average was down 134.51 (0.4%) at 32,908.27; the Nasdaq Composite was down 82.14 (0.6%) at 12,935.29.
• The 10-year Treasury yield was down about 5 basis points at 3.641%.
• Cboe's Volatility Index was up 0.26 at 17.74.

Regional banks were among the weakest performers Wednesday, while energy stocks also slumped as crude oil futures extended a recent sell-off. The utilities and healthcare sectors were among the few gainers. Despite weakness in technology, the Nasdaq still ended with a gain of 5.8% for the month, while the S&P 500 was up 0.3%. The U.S. dollar index rose to a 2½-month high.

The following companies had large, news-driven stock price moves:

• Advance Auto Parts (AAP) reported adjusted earnings of 72 cents per share, less than a third of what analysts had expected. The company also cut its quarterly dividend. Shares of the car parts retailer tumbled 35%.
• American Airlines (AAL) boosted its earnings per share forecast for the current quarter to a range of $1.45 to $1.65 from a previous estimate of $1.20 to $1.40, citing improvement in unit revenue and "continued strength in the demand environment," according to a filing with the Securities and Exchange Commission. The airline also hiked its margin expectations. Its shares rose about 1%.
• Avis (CAR) shares were upgraded by a Deutsche Bank analyst to "buy" from "hold."  The analyst also upped his price target to $263 from $239, citing in part a resumption of share repurchases during the second half of the year. The car rental company's shares rose about 2.4%.
• Hewlett-Packard Enterprise (HPE) reported slightly higher-than-expected earnings per share but also lower-than-expected revenue. The company also lowered its forecast for the year. The servers and networking company's shares were down nearly 7%
• HP Inc. (HPQ) also reported disappointing quarterly numbers, sending shares of the personal computer maker down nearly 6%.
• Intel's (INTC) chief financial official told a conference the company could soon see improved fortunes, noting the data center division is starting to "turn the corner," and adding China inventory should start to ease after the third quarter. Its shares rose 5.3%.

More tech earnings follow later Wednesday, with Salesforce (CRM) expected to report after the close. Strong results in the cloud software maker's fourth quarter sent the company's shares rallying 16%. Its stock has surged about 67% so far in 2023. Salesforce is expected to report earnings of $1.06 per share, according to Nasdaq.

Other companies expected to report this week include Broadcom (AVGO), Dell Technologies (DELL), Dollar General (DG), Hormel Foods (HRL), and lululemon (LULU).

Early Wednesday, the Labor Department's Jobs Openings and Labor Turnover Survey (JOLTS) showed the number of openings as of late April rose to 10.1 million, up about 358,000 from a month earlier. It was also stronger than the 9.5 million openings analysts polled by Dow Jones were expecting.

The JOLTS number suggests the labor market remains strong, perhaps stronger than the Fed would prefer as it continues efforts to further tamp down inflation that's still more than double the central bank's 2% long-term target.

Friday's May employment report may provide clues to the Fed's next move. Economists expect payrolls growth to have slowed to 190,000 in May, following an increase of 253,000 in April, according to Briefing.com.

Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research, notes that the JOLTS report sent Treasury yields sharply higher early Tuesday as the strong labor market supports the case for additional Fed rate hikes. 

"We expect yields to remain relatively rangebound for now, but volatility will likely stay elevated as the markets try to decipher if each economic release supports the case for more rate hikes or not," Collin says. "One more rate hike is being priced in by July and the federal funds rate is expected to remain above 5% through the end of the year, per the fed funds futures market. That's a big change from earlier this month when the markets were pricing in three rate cuts by the end of the year."