Closing Market Update: Debt Watch Continues

The tech sector continued to outshine the broader market Tuesday, as the buzz around artificial intelligence (AI) helped power the Nasdaq to a 9½-month closing high despite the continuing lack of clarity on the debt ceiling.

The outlook for a compromise bill to raise the U.S. debt ceiling, forged over the weekend by President Biden and House Speaker Kevin McCarthy, remained unclear with a House Rules Committee vote looming later Tuesday. The debt ceiling is sure to consume much of the market's attention this week as the projected default date June 5 approaches. Investors also await monthly employment numbers Friday.

Schwab senior investment strategist Kevin Gordon says the AI-driven tech surge has obscured real weakness in the benchmark indexes.

"Even today, with the Nasdaq moving higher, the number of stocks declining is greater than the number advancing," Kevin says. "That's also the case in the S&P 500^®, the Dow and the Russell 2000. At a time when a few names are carrying the market higher, at some point it becomes an outsized risk for the entire market."

Late Tuesday, declining stocks outnumbered advancing companies by about 2,005 to 1,846 on the NYSE. Much of this dynamic comes down to big companies leading the way, and small companies lagging.

Here is where the major benchmarks ended:

• The S&P 500 Index was up 0.07 point at 4205.52; the Dow Jones industrial average was down 50.56 (0.2%) at 33,042.78; the Nasdaq Composite was up 41.74 (0.32%) at 13,017.43.
• The 10-year Treasury yield was down about 13 basis points at 3.694%.
• Cboe's Volatility Index was little changed at 17.46.

Oilfield services companies and others in energy were among the weakest performers as crude oil futures dropped more than 4% to less than $70 a barrel, reflecting ample supply. Consumer staples and health care were also weak. The U.S. dollar index was down slightly after rising earlier to its highest level since mid-March.

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

• Reports of a strong weekend for holiday travel boosted air carriers. American Airlines (AAL) was up nearly 2%, while Delta Air Lines (DAL) was up 1.1% and United Airlines (UAL) was about 1.4% higher.
• Coinbase (COIN) shares were upgraded by Atlantic Equities, which called the company the "best expression of crypto," reports said. Coinbase jumped about 7%.
• Ford Motor Co. (F) shares were upgraded to "buy" from "hold" by Jefferies, which cited greater confidence in the automaker's management and plans following a recent investor event. Ford shares were up 4.1%.
• Nvidia (NVDA) shares extended recent gains, adding about 2.8%. Tuesday's move pushes the company's market capitalization to around $1 trillion, a tier it would share with fellow mega-cap tech companies Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT).
• Tesla (TSLA) shares were up nearly 4% after reports said CEO Elon Musk was making his first visit to China in three years. Musk is expected to meet with senior Chinese officials and visit Tesla's Shanghai plant.

This week brings more earnings from the tech sector, with HP (HPQ) and Hewlett-Packard Enterprise (HPE) expected to report results after Tuesday's close. Salesforce (CRM) is due to report Wednesday and Broadcom (AVGO) on Thursday. Other companies expected to report earnings include Chewy (CHWY), Dollar General (DG), and lululemon (LULU).

Otherwise, earnings season is largely finished, with about 97% of S&P 500 companies having reported. Of those companies, 78% beat Wall Street analysts' estimates, according to FactSet, though expectations were relatively low coming in.

Although the debt ceiling is dominating the news on the policy front, investors are also keenly focused on economic updates that could help determine the Federal Reserve's next moves. A recent string of surprisingly strong data releases appears to have rapidly deflated expectations the Fed is near a much-anticipated "pause" in its rate-hiking efforts to subdue still-high inflation.

Early Tuesday, the Conference Board said its consumer confidence index fell to 102.3 in May from 103.7 in April, but that was still stronger than the 99.5 economists polled by Briefing.com were expecting.

Consumers' view of current conditions "became somewhat less upbeat while their expectations remained gloomy," Ataman Ozyildirim, a Conference Board economist, says in a statement.

"Consumers also became more downbeat about future business conditions," the economist adds. "However, expectations for jobs and incomes over the next six months held relatively steady."

The most hotly anticipated data update this week will likely be Friday's Nonfarm Payrolls report for May from the Labor Department. Economists expect payrolls to have grown by 190,000 in May following an increase of 253,000 in April, according to Briefing.com.

"Inflation data continue to support a hawkish Fed," Kevin says, pointing to last Friday's higher-than-expected Personal Consumption Expenditures (PCE) numbers. The PCE data "suggests investors—once again—started to get ahead of themselves in expecting the Fed to pause imminently and declare victory on inflation. The jobs data could, in fact, change the narrative again, but on balance, inflation is not showing signs of slowing to the Fed's 2% target any time soon."

"With core inflation metrics hovering in the 4% to 5% range, the Fed has enough reason to maintain its aggressive posture," he adds. "That means attention will increasingly shift to labor, because it's taking time for wage growth to ease."

Late Tuesday, the market was pricing in a roughly 65% probability of the Fed raising its benchmark rate by another quarter point at its June 13–14 meeting, according to the CME FedWatch tool. That's up from just a 28% probability a week ago.