Stocks Rebound, Led by Chips, as CPI Data Looms

By Joe Mazzola

Stocks scrambled higher early today, seeing some "buy the dip" action after the chip sector's 10% plunge made Friday Wall Street's worst day of the year. The weekend didn't exactly calm matters, featuring new flare-ups in the Middle East, while inflation data due later this week could reinforce ideas that expensive crude is spilling into the broader economy.

The S&P 500 Index dropped more than 2.6% Friday to end a nine-week win streak after May jobs growth of 172,000 doubled consensus. Treasury yields spiked on fears the economy might be overheating, raising odds of the Federal Reserve hiking rates to fight inflation. Chances of at least one hike this year were 72% early Monday, according to the CME FedWatch Tool. "Right now, the balance of risks should favor a hike over a cut down the road, but the outlook is very uncertain and therefore we expect an extended pause rather than a near-term hike," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research (SCFR).

Last week's lackluster guidance from chip giant Broadcom (AVGO) and an equity offering from Alphabet (GOOGL) also contributed to Friday's stomach-churning market retreat, while Iran and Israel's strikes against each other Sunday kept geopolitical tension simmering, though both halted attacks this morning. "The blowout monthly jobs report and spike in bond yields triggered profit taking from traders," said Nathan Peterson, director of derivatives research and strategy at SCFR, in his weekly trader's outlook column. "As traders, we shouldn't be too shocked by this sharp pullback in tech stocks, given the velocity of the rally over the past two months."

Three things to watch

Sweet turns sour as rate hike worries grow: Three straight months of U.S. jobs growth, steady unemployment, and rising wages all added up to a big red slash in the equity markets Friday. It may be something investors have to grow used to, bringing back a taste of the 2022-2023 era when investors were cautious about enjoying positive data with the Fed hanging over their shoulders. Rate-hike worries will do that to investors, making every economic number a test of whether it might influence the Fed's eagerness to push down inflation. Before the hot jobs report, with its equally hot upward revisions, there was a sense that the Fed was pitched roughly 50-50 in terms of its dual mandate of maximum employment and stable prices. At least for now, the report appeared likely to move the Fed far more toward the stable prices element of its mandate, especially with inflation still well above its 2% target. The Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) Thursday arrive right on time to stir the mix, and anything above expectations could keep investors cautious rather than eager to buy dips. "Inflation is a key driver here," Martin said. "High inflation with a very uncertain outlook should mean investors demand higher yields as compensation."
Earnings anxiety helped fuel Friday's selloff: Much of the tech rally the last two months rested on massive first-quarter earnings gains for the chip sector reflecting heavy spending by data center companies building AI infrastructure. Higher borrowing costs associated with possible rate hikes would potentially lead to less spending, especially as many big companies increasingly look to borrowing to fund their AI spending. S&P 500 earnings growth this year is expected to be 22.8%, FactSet said Friday. That includes 44.1% growth in the info tech sector, which includes the major chip stocks. The doubling of the PHLX Semiconductor Index (SOX) index since late March bakes in that sort of sizzling earnings growth. If demand is truly flattening (something far from proven) and rates are rising, investors and analysts would potentially rethink those heavy earnings growth estimates. In such a case, current stock prices would likely be tougher to justify. This helps explain Friday's caution.
Winter is here (again). Bitcoin investors found themselves back in a cold, dark winter Friday. The cryptocurrency lost about 6%, broke through its February low around $60,000, and hit the lowest level since October 2024. It's been a breathtaking reversal. Less than a month ago, bitcoin neared its 200-day moving average, spurring talk of a thaw to "crypto winter." As of late Friday, it had lost 26% since May 14. Shortly after that date, a lot of open positions turned red as price moved below $78,000, data provider Glassnode's true market mean, defined as the average cost basis for active investors who purchased coins on the secondary market. No doubt, that fueled additional selling. Over the past week, realized losses on bitcoin positions have averaged $1.2 billion a day, according to Glassnode data. A lot of recent selling was likely caused by a forced deleveraging in futures markets, said Jim Ferraioli, director of digital currencies research and strategy at SCFR. If price makes a sustained move below $60,000, the next support level is probably in the $50,000 to $55,000 range, Ferraioli said.

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