Stocks Rally on Positive US Economic News and Strength in Chipmakers

US equities closed higher on Wednesday, recovering from initial declines, as stronger-than-expected economic data, including robust ADP employment and an 8-month high in ISM services activity, bolstered optimism despite rising service sector price pressures and a 4-week high in 10-year T-note yields. A broad rally in chipmakers provided significant market support, offsetting declines in some AI-infrastructure stocks like Super Micro Computer due to disappointing earnings. While Q3 corporate earnings largely beat forecasts, overall profit growth was the smallest in two years, indicating a mixed corporate outlook.

Analysis

US equities rebounded Wednesday, with the S&P 500, Dow, and Nasdaq 100 closing higher, fueled by stronger-than-expected economic data. The October ADP employment report showed private-sector job additions of 42,000, surpassing forecasts, and the ISM services index expanded at its fastest pace in eight months, reaching 52.4. This economic resilience, however, coincided with the ISM services prices paid sub-index unexpectedly rising to a three-year high of 70.0, signaling persistent inflationary pressures.

These hawkish data points pushed the 10-year T-note yield to a four-week high of 4.159%, causing T-notes to retreat despite the ongoing US government shutdown. Corporate earnings presented a mixed picture: 80% of S&P 500 companies beat Q3 forecasts, the best rate since 2021, but overall profit growth is projected at a two-year low of +7.2% year-over-year. Sectorally, chipmakers saw broad gains, while AI-infrastructure stocks like Super Micro Computer declined over 11% due to weak sales, indicating selective market strength.

The Supreme Court's skepticism regarding reciprocal tariffs introduces a potential fiscal risk of over $80 billion in refunds and could redefine future tariff authority. The market is currently pricing a 62% chance of a 25 bp Fed rate cut in December, a sentiment that appears to be at odds with the recent strong economic data and rising inflation signals.

Key Decisions for Investors

• Monitor inflation indicators, particularly service sector price pressures, as they could influence Fed policy despite current rate cut expectations.
• Evaluate corporate earnings reports for underlying profit growth trends and sales deceleration, rather than just beat rates, given the projected slowdown in overall growth.
• Assess exposure to AI-infrastructure stocks, as the recent correction in names like Super Micro Computer suggests a need for selective investment based on fundamental performance rather than broad sector enthusiasm.
• Consider the implications of rising Treasury yields on fixed-income portfolios and growth stock valuations, as strong economic data may continue to exert upward pressure.
• Keep an eye on developments regarding the US government shutdown and the Supreme Court's tariff ruling, as both carry significant fiscal and economic implications.