Wall Street’s AI Craze Drives Nasdaq 100 Up 1.5%: Markets Wrap

This content was published on December 7, 2023 - 21:46

8 minutes

(Bloomberg) — A rally in megacaps spurred a rebound in stocks on speculation the artificial-intelligence boom will keep fueling market gains.

Traders brushed off any jitters surrounding Friday’s US jobs report to reignite the trade that’s driven the Nasdaq 100 up over 45% this year. Optimism around AI resurfaced, with Alphabet Inc. up almost 5.5% a day after Google released Gemini, the “largest and most-capable AI model” it has ever built. Advanced Micro Devices Inc. also rallied after saying this week its new accelerator chips will run AI software faster than rival products.

“Artificial intelligence has potential to drive productivity gains sharply higher in 2024 and beyond,” said Yung-Yu Ma at BMO Wealth Management. “Resilience, adaptability and innovation have been hallmarks of the economy in 2023, and we see those factors carrying us through in 2024 as well.”

The Nasdaq 100 rose 1.5% and the S&P 500 halted a three-day drop. Treasuries saw small moves, with the 10-year yield edging higher to around 4.15%. Hawkish signals from the Bank of Japan drove the yen up over 2%. The dollar fell.

Krishna Guha at Evercore says he’s not “buying the idea” that the BOJ will seriously consider a surprise hike in December. “We think January is much more plausible,” he noted. “So while the direction of travel is right, today’s tactical trades have likely overshot.”

In a week jam-packed with labor-market readings, data showed continuing applications for US jobless benefits fell by the most since July. Despite the decline, continuing claims are still near a two-year high amid growing evidence of a cooling labor market. The data precedes the government’s monthly jobs report, which is forecast to show a pickup in hiring in November and the unemployment rate holding at 3.9%.

Countdown to Jobs:

Liz Young, head of investment strategy at SoFi:

“It’s clear that things are turning in the labor market, even if only a little bit. There’s been a subtle, but noticeable turn upward in the unemployment rate, and a steady grind higher in continuing jobless claims. For now, we welcome the turn of events. The most important problem to solve, however, will be cooling it enough to balance things out, but not too much that it destroys the situation. Cool it off, but don’t freeze it.”

Jose Torres, senior economist at Interactive Brokers:

“Tomorrow’s jobs report is likely to provide additional indications of the labor market softening, a welcome sign for employers who have faced challenges with wage pressures and staffing with the right candidates. Its impact on markets, however, will depend on whether investors view the data as a stepping stone to a March rate cut and soft landing, or an adverse effect on consumer spending and a sharper economic slowdown.”

Andrew Patterson, senior economist at Vanguard:

“We forecast the US economy added 160k jobs in November, continuing a broader trend among labor market indicators of a slowing labor market. While wage growth numbers have come in below-expectations in recent months we thinks risks for November are to the upside based on private-sector wage indicators. Ultimately, we think an upside surprise will be a head fake rather than a sign of wages reaccelerating.”

Craig Erlam, senior market analyst at Oanda:

“The jobless claims release today wasn’t particularly eventful in itself. The jobs report tomorrow is really significant, particularly the wages component.”

Optimism about disinflation and potential rate cuts next year played a big part in the recent stock rally. Yet a reading of cross-asset volatility shows risks aren’t as muted as they may appear. The gap between the MOVE Index, which tracks interest-rate volatility, and the VIX gauge of stock price swings has once again widened — suggesting rate markets remain choppy and could spark stress for equities at any time.

Marko Kolanovic at JPMorgan Chase & Co. warned clients that equities and other risk assets won’t be able to sustain any potential rallies without substantial rate cuts by central banks — and he doesn’t anticipate that unless markets drop severely or the economy stalls. For that reason, he said investors should opt for cash or bonds over stocks.

“This is a catch-22 situation,” Kolanovic said. “This would imply that we would need to first see some market declines and volatility during 2024 before easing of monetary conditions and a more sustainable rally.”

US stocks are already reflecting an optimistic outlook on economic growth, leaving them “vulnerable” to any macro shocks, according to Goldman Sachs Group Inc. strategists including Ryan Hammond and David Kostin.

“We believe much of the optimistic scenario is already reflected in US equity prices today,” they wrote.

Meantime, Bank of America Corp.’s quant strategists say that after the big tech-fueled rally in 2023, the S&P 500 has the potential to rise next year — even without their support. Concerns about narrow market breadth are “misplaced” as bull markets in the past four decades — outside of the dotcom bubble — have always ended with far better breadth, they noted.

“Unlike this year during which the ‘Magnificent 7’ did 70% of the work, we expect broader leadership,” said Savita Subramanian, referring to contributions from the likes of Apple, Nvidia and Microsoft to the rally.

Corporate Highlights:

Broadcom Inc., which just completed the acquisition of VMware Inc. for more than $60 billion, posted its slowest sales growth since 2020 as the chipmaker tries to pull out of an industrywide slump.
Lululemon Athletica Inc. reported guidance for the fourth quarter that fell short of expectations, disappointing investors who have grown accustomed to many quarters of better-than-forecast results from the activewear retailer.
Tesla Inc.’s Dojo supercomputer project lead Ganesh Venkataramanan has left the company, according to people familiar with the matter, a setback to the automaker’s self-driving technology efforts.
Dish Network Corp. surged after the US Federal Communications Commission approved its merger with EchoStar Corp.
JetBlue Airways Corp. boosted its full-year financial outlook, citing better-than-expected bookings and operational performance this fall.
Dollar General Corp. reported comparable sales that were better than the average analyst estimate.
Elon Musk’s SpaceX has initiated discussions about selling insider shares at a price that values the closely held company at $175 billion or more, according to people familiar with the matter.

Key events this week:

Germany CPI, Friday
Japan household spending, GDP, Friday
Reserve Bank of Australia’s head of financial stability Andrea Brischetto speaks at Sydney Banking and Financial Stability conference, Friday
US jobs report, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks