S&P 500 Enters Bull Market Territory: Investors Bet On Fed Holding Rates Steady In June As Services Sector Expansion Slows

The S&P 500 index continued to rise at the start of the week, firmly entering bull market territory after rising 23% from its October 2022 lows. On Monday, investors digested a significantly lower-than-expected ISM Services figure for May, which fell to the lowest levels in five months, indicating a slowing in demand momentum.

The data further solidified investor expectations that the Fed will keep rates unchanged at its meeting next week on June 14. The market-implied market probability of a rate hike has fallen to a mere 23%.

Cues From Monday's Trading:

The session was mixed for U.S. stocks. Both the S&P 500 and the Nasdaq 100 index ticked higher, by 0.3% and 0.6%, respectively. The Dow Jones Industrial Average and the Russell 2000 index traded in the red, down 0.2% and 0.9%, respectively.

Growth continued to outperform value, as tech and communication services further rose, while cyclical sectors were broadly weaker. 

Analyst Color:

The May non-farm payrolls report, the budget deal and hopes of the Fed skipping a rate hike in June helped spark a broad-based rally on Friday, said LPL Financial Chief Global Strategist Quincy Crosby.

Friday’s rally was inclusive, the analyst said, noting that the Russell 2000 marched higher along with its large-cap peers — a dynamic that has been missing since the onset of the banking crisis.

The Russell 2000’s small-cap and mid-cap participation is especially important due to the index being a bellwether for the broader economy and the fact that it comprises a cross-section of small and regional banks, Crosby said.

"Today’s rally doesn’t mean the market isn’t facing significant headwinds," the analyst warned.

"To be sure, the ramifications of the deluge of Treasury notes — approximately $1 trillion worth of notes — soon to be auctioned by the Treasury as it replenishes its General Account, could ignite a significant sapping of liquidity from financial markets."

Crosby is of the view the Fed’s insinuation that a June hike is off the table could be reflecting the central bank’s concerns regarding the potential for increased market volatility stemming from dissipating liquidity.

Monday's Trading In Major U.S. Equity ETFs: In midday trading on Monday, the SPDR S&P 500 ETF Trust SPY was 0.3% higher to $429.11, the SPDR Dow Jones Industrial Average ETF DIA fell 0.2% to $337.39 and the Invesco QQQ Trust QQQ was 0.7% higher to $357.01, according to Benzinga Pro data.

Among U.S. equity sectors, the Industrials Select Sector SPDR Fund XLI was the underperformer of the day, down 0.5%,  followed by the Financials Select Sector SPDR Fund XLF and the Consumer Staples Select Sector SPDR Fund XLP, both down 0.3%. The Technology Select Sector SPDR Fund XLK and the Communication Services Select Sector SPDR Fund XLC saw a 0.5% and 0.7% surge, respectively. 

Latest Economic Data: 

The S&P Global US Services PMI figure for May was revised marginally lower from a preliminary 55.1 to 54.9. 

The Institute for Supply Management’s non-manufacturing PMI fell from 51.9 in April to 50.3 in May, marking to the fifth consecutive month of expansion in the services sector, but at the slowest pace so far. 

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Stocks In Focus:

• Epam Systems, Inc. EPAM fell 19% as Needham cut its price target from $325 to $275.
• Palo Alto Networks, Inc. PANW rose over 5%, as the stock is set to join the S&P 500 Index on June 20. Dish Network Corp. DISH, which is booted out of the index to make way for Palo Alto fell nearly 5%.
• Apple, Inc. AAPL gained moderately ahead of its annual Worldwide Developers Conference that began at 1 p.m. ET. The stock also received a price target boost from Oppenheimer.
• Science Applications International Corp. SAIC and GitLab, Inc. GTLB are among the notable companies due to release their earnings on Monday.

Commodities, Bonds, Other Global Equity Markets:

Crude oil rocketed almost 1.5%, with a barrel of WTI-grade crude rising to $72.90, following Saudi Arabia's announcement of production cuts. The United States Oil Fund ETF USO was 1.2% higher to $65 per share.  

Treasury yields were unchanged, with the 10-year yield at 3.69% and the two-year yield at 4.5%. The iShares 20+ Year Treasury Bond ETF TLT was also flat for the day. 

The dollar was steady, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, unchanged. The EUR/USD pair, which is tracked by the Invesco CurrecyShares Euro Currency Trust FXE, was 0.05% higher to 1.0710.

European equity indices were all in the red. The SPDR DJ Euro STOXX 50 Etf  FEZ fell 0.7%. 

Gold gained 0.4% to $1,960/oz. The SPDR Gold Trust GLD was 0.5% higher to $182. Silver fell 0.3% to $23.54, with the iShares Silver Trust SLV down 0.3% to $21.62 per unit. Bitcoin BTC/USD fell 5% to $25,740.

Staff writer Piero Cingari updated this report midday Monday.

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