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S&P 500 futures hold near two-month highs after strong rally


U.S. stock futures were little changed early Thursday, holding near two-month highs as traders took stock after the latest strong rally.

On Wednesday, the Dow Jones Industrial Average
DJIA
rose 164 points, or 0.47%, to 34991, the S&P 500
SPX
increased 7 points, or 0.16%, to 4503, and the Nasdaq Composite
COMP
gained 9 points, or 0.07%, to 14104.

What’s driving markets

Futures indicate equity indices are consolidating after their recent good run.

The S&P 500 sits at its best level since Sept. 14, having risen 11 of the last 13 sessions, with a 7.4% gain for the month to date. The tech-heavy Nasdaq Composite is up 12 of the last 14 days and has advanced 9.75% so far in November. The Russell 2000 index
RUT
of small caps has gained 8.4% over the same period.

A main driver of these rallies is a decline in borrowing costs. The 10-year Treasury yield
BX:TMUBMUSD10Y
has fallen from a 16-year high above 5% touched last month to 4.50% amid hopes that a cooling U.S. jobs market and easing inflation will allow the Federal Reserve to start cutting interest rates by the middle of next year.

Meanwhile, investors are becoming more confident that the Fed’s 500 basis points or so of rate rises this cycle will not cause a sharp slowdown for the U.S. economy, and that any so-called soft landing will still support corporate earnings.

However, with the CBOE VIX index
VIX,

a gauge of expected market volatility, trading back down near 14, and the S&P 500’s 14-day relative strength index moving from an oversold indication to the threshold of overbought with the space of just three weeks, there are some observers advising caution.

“[S]tock futures indicated a subdued opening amidst concerns that the market has jumped too far over its skis,” said Stephen Innes, managing partner at SPI Asset Management.

“The top question now for markets is whether traders and investors have been too hasty extrapolating a run of soft U.S. macro data into a Fed easing cycle commencing from late Q1 2024. The concern is that markets are now overestimating the chances of full-on Fed accommodation,” Innes added.

Indeed, a reminder of the market’s underlying fragility came after hours on Wednesday, when poorly-received results from Cisco Systems

CSCO

saw the networking company’s stock drop more than 10%.

Companies reporting results before the opening bell include Walmart

WMT

,
Macy’s

M

and Williams-Sonoma

WSM

,
while Applied Materials

AMAT

,
Gap

GPS

and Beazer Homes


BZH

will present their earnings after the market close.

Mark Newton, head of technical strategy at Fundstrat, welcomed the fact that the equity market has of late seen a wider proportion of shares joining the rally, with gains not just powered by big tech stocks, and this improvement in breadth could extend the advance in coming days.

But he added: “However, short-term overbought conditions as part of a negative momentum trend on weekly and monthly charts suggest rallies into next week would likely arrive at strong resistance. The short-term risk/reward for U.S. Equities won’t be as positive following any further rally into next week.”

U.S. economic updates set for release on Thursday include weekly initial jobless claims, the October import price index, and the November Philadelphia Fed manufacturing survey, all due at 8:30 am. Eastern.

Industrial production and capacity utilization for October will be published at 9:15 a.m., followed at 10 a.m. by November home builder confidence.

There is a large cohort of Fed officials making comments on Thursday, including Cleveland Fed President Loretta Mester speaking at 8:30 a.m.; New York Fed President John Williams at 9:25 a.m.; Fed Vice Chair for Supervision Michael Barr at 10:35 a.m.; and Fed Governor Lisa Cook at noon.



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