Stocks Rebound, Led by Chips, as CPI Data Looms

Hopes for an Extended Ceasefire Lift Stocks

By Joe Mazzola

Major indexes spiked early Monday after the U.S. and Iran agreed to an extended ceasefire that ends the U.S. blockade of Iran's oil and opens the Strait of Hormuz. Markets overseas surged overnight and U.S. trading followed suit, led by tech, as crude oil fell to the lowest level since mid-April near $80 per barrel. It could take weeks or months for the oil market to normalize.

Along with more details about the peace deal, investors await a Federal Reserve rate decision Wednesday. Data is peppered throughout the week, starting with May industrial production right before today's open, which is a key metric to gauge recession risk. Housing numbers will be released tomorrow and retail sales data Wednesday.

Stocks wrapped up a volatile week on a positive note Friday as all major indexes closed higher. The IPO and trading debut of SpaceX (SPCX) and renewed hopes for a war deal bolstered sentiment. Nine of the 11 S&P 500 sectors ended the session positive, led by materials and financials. It's a shortened week for trading with U.S. markets closed Friday for the Juneteenth holiday. That could mean lighter volume toward the end of the week that might exacerbate volatility, which remains elevated.

Three things to watch

Warsh debut awaited: Wednesday's Fed meeting is the first helmed by new Chairman Kevin Warsh, who could stamp his imprint at his initial press conference after Wednesday's 2 p.m. ET decision. Heading into the week, odds of the Fed standing pat on rates were 98.6%, according to the CME FedWatch Tool. The key news is under the surface in the Fed's economic and rate projections. The quarterly "dot plot" issued in March baked in a single rate cut this year. That's likely to change, but the question is whether enough policymakers pencil in a possible rate hike to make that the likeliest outcome for 2026. Warsh reportedly isn't a fan of the dot plot, which tracks policymakers' estimates of where rates will head in coming years. Still, it's a fact on the ground for now and could be influential. Futures trading bakes in a likely hike by December, but that's not certain. "We think the Fed and the various policymakers will need to see how the next few months evolve and what inflationary trends look like," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research (SCFR), noting that last week's May Consumer Price Index (CPI) came in a little better than expected in terms of core CPI, which excludes food and energy.
Breadth check: Market breadth remains middle of the road with 56% of S&P 500 stocks now trading above their 50-day moving average, but that's well above mid-May lows below 45% during the heart of the chip rally, implying more stocks are now participating in a general upward move. "Over the past month, about a third of the S&P is now outperforming the index itself, and I think we could again see some broadening out," said Liz Ann Sonders, chief investment strategist at SCFR. Backing that up, the S&P 500 Equal Weight Index (SPXEW) was back to outperforming the cap-weighted S&P 500 year-to-date late last week. On another technical note, the Relative Strength Index (RSI) for both the S&P 500 and the Nasdaq-100^® (NDX) were just below 53 and just above 55, respectively, to end the old week, neither of which raises overbought concerns. For that to be the case, a reading above 70 would have to be in place, which was the case for the Nasdaq-100 earlier this month before its 4.4% pullback between June 2 and June 10.
Hyperscaler spending raises concerns: It's likely no surprise to investors that so-called "hyperscalers" spending hundreds of billions of dollars this year on AI account for a huge share of total S&P 500 capital spending, at around 40%. At the same time, however, hyperscalers' net income as a share of S&P 500 net income, is only about 20%, and that spread has been widening. "That, I think it's part of the reason why there's some heightened sensitivity about how much longer this can go on at the pace we're seeing," Sonders said in Friday's Schwab On Investing podcast. "I think this AI story is going to continue to be paramount in driving market performance, but we have seen a bit of a broadening out. One of the concerns was not just valuation, which has been an ongoing concern, but the circularity of financing in this AI sphere," meaning companies investing in each other as they build out AI.

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