S&P 500 Poised for Best Day Since January 2023 Amid Rebounding Market

Stocks made a strong recovery and bonds fell as the latest US labor-market data alleviated concerns about a deeper slowdown in the world’s largest economy.

All major sectors of the S&P 500 advanced, with the index set for its most significant rally since January 2023, following data that showed US initial jobless claims dropped the most in nearly a year. As economic concerns eased, Treasuries fell across the board, with the selloff led by shorter maturities. Bonds maintained their losses after a weak $25 billion auction of 30-year government debt.

Markets have been turbulent since last week’s economic data raised fears that the Federal Reserve might be delaying rate cuts from a two-decade high, thus jeopardizing a “soft landing.” This unease, combined with stretched positions, underwhelming tech earnings, and poor seasonal trends, contributed to significant financial volatility.

“Good news with jobless claims coming in lower than expected,” said Chris Zaccarelli of Independent Advisor Alliance. “It’s hard to believe a recession has already begun. We are cautious but believe the panic earlier this month was overblown.”

The S&P 500 surged over 2%, the tech-heavy Nasdaq 100 climbed 3%, and the Russell 2000, representing smaller firms, added 2%. Nvidia Corp. led gains among tech giants, while Eli Lilly & Co. soared on a positive outlook driven by strong sales of its weight-loss drugs. Treasury 10-year yields rose five basis points to 4%. Swap traders further reduced bets on aggressive Federal Reserve easing in 2024. Cryptocurrencies also surged as investors returned to riskier assets across financial markets.

“Stocks are rebounding from yesterday’s intraday reversal as recession fears subside following today’s decent unemployment claims data,” said Jose Torres at Interactive Brokers.

Initial claims fell by 17,000 to 233,000 in the week ending August 3, according to Labor Department data released Thursday. Any data suggesting that the Fed is on track with its anticipated rate cut in September is welcome news for investors, according to Bret Kenwell at eToro.

While traders have scaled back their expectations for substantial rate cuts in the US this year, they are still pricing in about 38 basis points of easing for September. Overall, they anticipate around 103 basis points of cuts in 2024, compared to about 65 basis points just over a week ago.

Neil Dutta at Renaissance Macro Research highlighted the current debate on whether the Fed should begin easing soon and whether a significant initial cut is likely. “We are rallying today because of jobless claims!” Dutta remarked. “That’s unusual. If data next week shows downside surprises, it will only fuel the notion that the Fed might be behind the curve.”

Despite the recent market rout flushing out some speculative excess, US stocks remain at risk of more substantial declines if growth continues to slow and the Fed fails to show urgency in easing monetary policy, warned Dubravko Lakos-Bujas at JPMorgan Chase & Co. Treasuries have faced a perfect storm over the past two weeks, and investors are likely to remain focused on carry trade unwinds, labor market data, growth indicators, inflation, and geopolitical risks in the coming weeks, noted Gennadiy Goldberg of TD Securities.

“Markets will continue to worry about the risk of a 50 basis-point cut in September and potential intermeeting cuts, though the pricing for both has receded significantly from recent highs,” he said. “We expect the Fed to cut rates by 25 basis points at each meeting starting in September until rates reach neutral at 3% by late 2025.”