Stocks Settle Mostly Higher on Government Reopening Optimism

US stock indexes closed mostly higher on Tuesday, with the S&P 500 and Dow reaching recent highs, buoyed by optimism for a US government shutdown resolution and strong Q3 corporate earnings, where 82% of S&P 500 companies exceeded forecasts. Conversely, the Nasdaq 100 declined, pressured by weakness in AI-infrastructure and semiconductor stocks, including CoreWeave's Q4 warning and SoftBank's $5.83 billion Nvidia stake sale. Concurrently, weaker US labor market data, indicated by ADP payrolls and small business optimism, supported a rally in T-notes and heightened expectations for a Fed rate cut, while European bond yields also fell.

Analysis

The S&P 500 and Dow Jones Industrials closed higher, reaching 1-week and 1.5-week highs respectively, driven by optimism surrounding the impending resolution of the US government shutdown. This positive sentiment was further bolstered by robust Q3 corporate earnings, with 82% of reporting S&P 500 companies exceeding forecasts, leading to a 14.6% year-over-year earnings growth, significantly above the 7.2% expectation. Pharmaceutical and health insurance stocks notably rallied, with Viatris gaining over 10% and Moderna over 6%.

Conversely, the Nasdaq 100 declined, primarily pressured by weakness in AI-infrastructure and semiconductor stocks. CoreWeave fell over 16% following a data center delay impacting Q4 expectations, while Nvidia dropped more than 2% after SoftBank Group divested its entire $5.83 billion stake. Other chip stocks like Micron and Marvell also saw declines exceeding 4%, indicating a sector-specific downturn.

This sector-specific pressure was compounded by broader economic signals of a weakening labor market, including a weekly ADP report showing private employers shedding an average of 11,250 jobs and the US Oct NFIB small business optimism index falling to a 6-month low of 98.2. These dovish labor market indicators have increased expectations for a Federal Reserve rate cut, with markets now discounting a 67% chance of a 25 basis point reduction at the December FOMC meeting, leading to a rally in T-notes.

In Europe, while ECB officials maintained a data-dependent stance, lower bond yields in Germany and the UK reflected broader economic concerns, despite a low 3% chance of an ECB rate cut. The German Nov ZEW survey expectations unexpectedly fell to 38.5, and UK employment data showed an unexpected decline of 22,000, further highlighting economic fragility.

Key Decisions for Investors

• Investors should consider a balanced portfolio approach, acknowledging the divergence between robust Q3 corporate earnings and specific tech sector headwinds.
• Monitor upcoming labor market data closely, as continued weakness could solidify expectations for a Fed rate cut, impacting interest-rate sensitive assets and potentially supporting fixed income.
• Evaluate exposure to AI-infrastructure and semiconductor stocks, given recent underperformance and company-specific downgrades, while potentially exploring opportunities in resilient sectors like pharmaceuticals and health insurance.