Dow and S&P Rise as Nasdaq Faces Selling Pressure

US stock indexes presented a mixed picture, with the S&P 500 and Dow Jones Industrials rising while the Nasdaq 100 declined, primarily due to weakness in AI-infrastructure and semiconductor stocks, notably CoreWeave's Q4 earnings warning and SoftBank's sale of its Nvidia stake. Market sentiment was buoyed by strong Q3 corporate earnings, with 82% of S&P 500 companies exceeding forecasts, and progress towards resolving the US government shutdown. Concurrently, a dovish ADP jobs report, indicating private sector job losses, supported Treasury gains and increased market expectations for a 25bp Fed rate cut to 67% at the next FOMC meeting.

Analysis

US equity markets exhibited a mixed performance, with the S&P 500 gaining +0.22% and the Dow Jones Industrials up +1.01%, while the Nasdaq 100 declined by -0.19%. This divergence was primarily driven by significant weakness in AI-infrastructure and semiconductor stocks; CoreWeave fell over -15% on Q4 earnings impact from data center delays, and Nvidia dropped more than -2% following SoftBank Group's $5.83 billion stake sale.

Broader market sentiment was supported by strong Q3 corporate earnings, with 82% of reporting S&P 500 companies exceeding forecasts, leading to a +14.6% earnings growth, significantly above the +7.2% expectation. Additionally, progress towards resolving the US government shutdown, with the Senate passing a temporary continuing resolution and House approval anticipated, provided a positive catalyst.

Monetary policy expectations shifted dovishly as a weekly ADP report indicated US private employers shed an average of 11,250 jobs, suggesting a weakening labor market. This data point increased the market-discounted probability of a 25 basis point Fed rate cut at the December FOMC meeting to 67%, supporting gains in December 10-year T-notes, which rose by +10 ticks.

European economic data also showed weakness, with UK employment unexpectedly falling by 22,000 and the ILO unemployment rate rising to a 4.5-year high of 5.0%. Despite this, ECB officials maintained that current interest rates are appropriate, emphasizing a data-dependent approach for future policy decisions.

Key Decisions for Investors

• Investors should re-evaluate exposure to AI and semiconductor stocks, considering recent underperformance driven by company-specific headwinds and profit-taking, which may signal a rotation out of these high-growth segments.
• Monitor upcoming US economic data, particularly labor market indicators, for further signs of weakening that could solidify expectations for a Fed rate cut, potentially impacting bond yields and interest-rate sensitive sectors.
• Assess companies with strong Q3 earnings beats and positive forward guidance, such as RealReal and Paramount Skydance, for potential investment opportunities, while exercising caution with firms facing downgrades or missed expectations like Gemini Space Station and Rigetti Computing.