Closing Market Update

U.S. stocks closed out a weak September with another wobble, as high Treasury yields and oil prices took their toll alongside a growing realization that the Federal Reserve's high-altitude interest rates could be with us for a while. The S&P 500^® Index (SPX) dropped for a fourth-consecutive week and lost 4.9% for the month.

Not even seemingly "good" news on inflation was enough lift the market's spirits. Earlier Friday, the government said the overall Personal Consumption Expenditure Index (PCE) rose 0.4% in August from July, in line with what analysts were expecting. The core rate, which excludes food and energy, rose a slightly smaller-than-expected 0.1%. PCE is the Fed's preferred inflation gauge.

The PCE numbers briefly lifted the market, briefly raising hopes stocks might be in for another day of gains after Thursday's small bounce, only for the momentum to fade later in the session. Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, says any gains notched in recent sessions were more of a "relief rally" after a string of down days. The factors that have hurt sentiment in recent recessions—historically high Treasury yields and surging oil prices, among them—haven't changed.

"Selling pressure resumed Friday, and the same bearish dynamics could carry forward into early October," Nate says. "Although we are moving into a seasonal period that's historically been bullish for stocks, the bears have a lot of ammunition: Stocks appear fully valued, bond yields and oil prices remain high, and the U.S. dollar is strong."

The impending earnings season will be critical to the market's direction the rest of the year and early 2024, he adds.

"What bulls need is earnings-per-share growth to justify the next 'leg up' in higher-risk assets like equities, so this will be an important earning season," Nate says.

Here is where the major benchmarks ended:

• The S&P 500 Index was down 11.65 points (0.3%) at 4,288.05, down 0.7% for the week; the Dow Jones Industrial Average (DJIA) was down 158.84 points (0.5%) at 33,507.50, down 1.3% for the week; the Nasdaq Composite (COMP) was up 18.05 points (0.1%) at 13,219.32, up slightly for the week but down 5.8% for the month.
• The 10-year Treasury note yield (TNX) was down about 1 basis point at 4.583%.
• Cboe's Volatility Index (VIX) was up 0.18 at 17.52.

Energy stocks were among the market's weakest performers as crude oil futures extended a pullback from a rally earlier in the week that sent prices to 13-month highs above $93 a barrel. Health care and financial sectors were also soft. Regional banks, retailers, and consumer discretionary shares were among the strongest performers.

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Anheuser-Busch InBev (BUD) rose 3.6% after Bank of America upgraded the stock to "buy" from "neutral," citing factors including easing costs of goods sold.
• Blue Apron (APRN) shares more than doubled after the meal kit company said it had reached an agreement to be bought by Wonder Group for $13 per share.
• Chili's restaurant-parent Brinker International (EAT) rose 1.9% after Stifel upgraded the stock to "buy" from "hold, citing hopes for a successful turnaround.
• Bumble (BMBL) rose 3% after Loop Capital Markets upgraded the stock to "buy" from "hold," citing a strong cash balance and free cash flow generation.
• Carnival (CCL) shares fell more than 5% after the cruise operator projected a fourth-quarter loss that was even bigger than previous expectations, overshadowing stronger-than-expected results for the third quarter.
• Corcept Therapeutics (CORT) shares fell 17% following reports about patent litigation against Israeli generic drug-maker Teva Pharmaceuticals (TEVA). Teva was down 0.2%.
• Nike (NKE) rose 6.7% after the apparel maker reported stronger-than-expected quarterly earnings, though revenue fell short of forecasts.
• Texas Roadhouse (TXRH) rose 0.6% after Northcoast Research upgraded the restaurant chain's stock to a "buy," citing steady customer traffic.
• Tesla (TSLA) rose 1.6% after Canaccord Genuity reiterated a "buy" rating on the electrical vehicle maker's stock.
• Walgreens (WBA) shares rose 6.4% after Bloomberg reported Walgreens is considering Tim Wentworth, a former Cigna executive, as its next CEO.

The third-quarter earnings season won't start till mid-October, but a few companies of note are expected to report results for the previous quarter next week. Due Thursday: Constellation Brands (STZ), which licenses and distributes Corona and Modelo beers in the United States; food and beverage companies ConAgra Brands (CAG) and Lamb Weston Holdings (LW); and jeans maker Levi Strauss (LEVI).

It's unclear whether the June-September period will mark an end to the market's recent earnings "recession"—when profits suffer two consecutive quarters of year-over-year declines. Analysts polled by FactSet have scaled back their expectations for the quarter: Initially, they were expecting earnings by S&P 500 companies to grow 0.2% from a year earlier, but as of Friday they had switched to a 0.1% decline.

Overall PCE, like other recent inflation numbers, ticked higher in August in part because rising oil prices made gasoline and other fuels more expensive. However, the core rate showed a continued moderation in price pressures.

Overall PCE was up 3.5% in August from the same month in 2022, while the core rate was up 3.9% year-over-year. That's an improvement from the core rate's 4.3% annual rise in July and the first reading under 4% in almost two years. Both numbers were close to analysts' expectations.

Collin Martin, a fixed income strategist at the Schwab Center for Financial Research, notes the 0.1% monthly gain in core PCE was the smallest since late 2020.

"While it's too early to declare victory over inflation, the PCE numbers marked another step in the right direction and were likely welcome news at the Fed," Collin says, adding that market expectations for further Fed rate hikes continued to decline. Financial conditions have tightened recently and should continue to do so as "higher-for-longer" Fed policy weighs on the economy and slows lending, he adds.

Late Friday, investors were pricing in a 14% probability that the Federal Open Market Committee (FOMC) will raise its benchmark rate from its current 5.25% to 5.50% target range following its October 31 to November 1 meeting, according to the CME FedWatch Tool. By comparison, odds were pegged at 19% Thursday and nearly 28% a week ago.

Investors were also watching Washington, D.C., as the potential for a government shutdown starting October 1 loomed. Late Friday, House leaders failed to pass a short-term spending bill, which appeared to increase the likelihood of a weekend shutdown.

A shutdown "looks almost certain, but Congress will be in session this weekend and next week trying to resolve issues," says Michael Townsend, Schwab's managing director of legislative and regulatory affairs. A protracted shutdown could create uncertainty, especially if critical economic numbers, such as next Friday's Employment Situation Report, aren't released as scheduled.