Stock Market Update

Gayle Sprute

Vice President
Senior Portfolio Manager

Following a dismal first week of performance for U.S. stocks to open the month of September, U.S. stocks rallied sharply higher this week. The Nasdaq Composite and S&P 500 Index traded well into the green through Thursday’s market close, higher by 5.28% and 3.48% respectively. Information technology stocks moved strongly to the upside with oversold conditions, stemming from last week’s sell-off, and positive artificial intelligence (AI) headlines a couple of notable drivers. Outside of this week’s snap back in performance, investors remain focused on next week’s Federal Open Market Committee (FOMC) meeting with the debate ongoing as to what the Federal Reserve’s (Fed) policy move will be next week.  

On the heels of last week, in which the S&P 500 and Nasdaq traded lower by 4.22% and 5.76% respectively, investors snapped up beaten up information technology names. The technology sector took a thumping last week, trading down 7.05%, as economic growth worries, sparked by economic data, led to a round of risk-off trading. This week, through Thursday’s close, the information technology sector was trading higher by 6.89%. Oversold conditions, upbeat quarterly results from Oracle, and encouraging AI updates from the likes of Microsoft and Nvidia persuaded investors to flock back into growth and momentum stocks. On the flip side, some less bullish updates from a handful of banks weighed on financials, with the sector showing as one of this week’s laggards, up only 0.17% through Thursday. 

While risk-on trading ensued, the debate over the Fed’s policy decision at next week’s FOMC meeting continued in the background. Mid-week inflation data pared back market expectations for a jumbo 50 basis point interest rate cut next week, as core CPI (Consumer Price Index) and PPI (Producer Price Index) prints for the month of August both came in above expectations at 0.3% vs. 0.2%. Thursday afternoon brought a few media reports regarding the possibility of a 50 basis point cut from the Fed next week. Former New York Federal Reserve Bank President Bill Dudley also chimed in this week, noting there was a strong case for the Fed to cut rates by 50 basis points. The probability of a 50 basis point cut next week ultimately moved higher as the week progressed. As of Friday morning, the CME FedWatch Tool showed the market was pricing in the probability of a 25 basis point cut next week at 49%, and the probability of a 50 basis point cut at 51%. In comparison, one day ago the probabilities were for a 72% chance of a 25 basis point cut and a 28% chance of a 50 basis point cut.  

While the size of the Fed’s expected rate cut next week will clearly be a focus, perhaps equally important will be the release of the Fed’s updated Summary of Economic Projections. It will include the Fed’s dot plot, which shows each Fed official’s expectations for interest rates. Will the markets expectations for rate cuts in 2024 and 2025 be too bullish relative to the Fed’s expectations? It will be interesting to see how the market responds to the Fed’s policy move and subsequent commentary. 

Outside of next week’s FOMC meeting outcome, seasonality and election uncertainty remain top of mind. While soft landing optimism and expected Fed rate cuts could be bullish drivers for U.S. stocks, any further uptick in growth fears, in addition to negative seasonality and election uncertainties, could lead to a pickup in near-term volatility. The FOMC’s policy decision comes next week Wednesday.   

As of: 09/12/2024

Updates to the Equities Buy List: 

Adobe Inc. (ADBE)

Reported above consensus quarterly revenue and earnings results Thursday afternoon. Both ADBE’s Digital Media and Digital Experiences segments posted better-than-expected quarterly revenue, both showed double-digit growth. ADBE reported above consensus operating margin and showed a 15.4% increase in remaining performance obligations, with the latter coming in at $18.14 billion. While quarterly results beat consensus, the company’s quarterly guide missed both top and bottom-line consensus estimates at the respective midpoints. ADBE also guided for net new ARR Digital Media revenue to be ~$550 million vs. consensus expectations of ~$575 million. Disappointing guidance pressured shares in Friday’s trading session as artificial intelligence (AI) monetization concerns weighed on the name. Despite the guidance miss, ADBE continues to show solid generative AI demand, with the near-term guidance miss at least partially attributed to the timing of deals. The company remains focused on integrating AI across its products and creating value for customers. We continue to view ADBE as a leader amongst peers and maintain our BUY rating on shares.