S&P 500 eyes 10-month high after debt-ceiling deal, but Dow dips

What’s driving markets

U.S. stocks were looking to start the holiday-shortened week at fresh 10-month highs as traders welcomed a deal to extend the government debt-ceiling and as optimism over AI-derived earnings continued to underpin sentiment.

“Volumes should return to normal today after the U.S. long weekend, so we should get a much better read on market trends where optimism over a U.S. debt ceiling agreement may continue to support risk assets for the early part of the week,” said Stephen Innes, managing partner at SPI Asset Management.

Some analysts were more cautious, noting Congress must still pass the deal and this uncertainty may keep a lid on ebullience.

“While the initial reaction is likely to be positive, sentiment will be tempered fact that the deal is not yet over the line, with the next hurdle being Congress where there have already been some rumbles of dissatisfaction,” said Richard Hunter, head of markets at Interactive Investor. “In any event, further developments will be keenly awaited this week as the political saga continues to unfold, and until a definitive agreement is reached, markets are likely to resume something of a holding pattern.”

After reaching a deal over the Memorial Day Weekend, President Joe Biden and House Speaker Kevin McCarthy now have to sell it to their parties — and quickly. By June 5, the federal government exhausts its capacity to pay all its bills, Treasury Secretary Janet Yellen said last week.

Still, equity bulls will be hoping the S&P 500 can accelerate after finally managing on Friday to close above the 4,200 mark that had proved a stubborn top to a multi-month trading range.

Support could come from big technology stocks as investors look for more AI exposure and valuations are helped by retreating bond yields as debt ceiling angst eases, according to analysts.

The Nasdaq 100 index
NDX,
+0.70%,
boosted of late by the likes of AI-chipmaker Nvidia
NVDA,
+5.15%,
has jumped 30.7% so far in 2023 and sits at a more-than 12-month high.

“With the positive stock/bond correlation that has held for most of the past 18 months we will be looking for NDX to continue its rally,” said Julian Emanuel, strategist at Evercore ISI.

However, SPI’s Innes said that after the debt-ceiling relief rally, the focus could turn back on the many concerns that have kept most Wall Street analysts in a cautious mood.

“The first boat rocker could be Friday’s employment report for May which takes on immense importance as that will be the last major data point that Fed officials will have a chance to comment on before their June 14th rate decision,” said Innes.

Traders are now anticipating another Fed rate hike in June. There’s a 61% chance of another 25 basis point increase, according to the CME FedWatch tool. That’s up from a 28% chance one week earlier.

While the chance of another Fed hike is increasing, so are house prices.

Home prices increased in March with fewer listings on the market, according to the S&P Case-Shiller home price index. The climb was uneven, with strong price growth in the southeast but dragging prices in the west. At 10 a.m., there will be the latest release on consumer confidence for May.

Richmond Fed President Thomas Barkin is due to speak at at 1 p.m. Eastern.

Companies in focus

• Nvidia shares
  NVDA,
  +5.15%
  rose 5% ahead of the open. The graphics chipmaker that recently bolstered its earnings estimates on artificial-intelligence demand announced a flurry of new products over the weekend. AI excitement also bolstered shares of companies including Palantir Technologies
  PLTR,
  +5.82%,
  Advanced Micro Devices
  AMD,
  -1.65%
  and C3.ai
  AI,
  +12.54%.

• Tesla Inc.’s
  TSLA,
  +3.39%
  rose almost 5% as excitement built about Chief Executive Elon Musk’s visit to China, his first in about three years.

• Newell Brands Inc.
  NWL,
  -0.06%
  dropped less than 1% after the consumer-products parent company of Rubbermaid and other brands said it was embarking on a restructuring and savings plan intended to “streamline” its North American distribution network.