U.S. stocks experienced a strong surge on Wednesday, driven by a renewed appetite for risk, although overall sentiment remains fragile.
At 09:35 ET (13:35 GMT), the Dow Jones Industrial Average climbed by 225 points, or 0.6%. The S&P 500 increased by 66 points, or 1.2%, while the NASDAQ Composite soared by 260 points, or 1.5%.
Risk sentiment received a boost from comments made by a senior official at the Bank of Japan, who downplayed the bank’s plans to raise interest rates amidst ongoing market volatility.
The Bank of Japan’s 25 basis point rate hike at the end of last month had previously triggered a global sell-off in stocks as investors unwound their positions based on carry trades.
Market Stress Elevated
Despite the improved risk sentiment, concerns over slowing growth and middling earnings continue to weigh heavily on the market. Goldman Sachs highlighted that its Financial Stress Index (FSI) has tightened significantly over the past two days, but still remains within normal historical levels.
“Most of the tightening has been driven by higher expected volatility in the equity and bond markets, while conditions in short-term funding markets have remained broadly stable,” Goldman economists stated in a note.
“So while market stress is noticeably higher than a week ago, our FSI suggests that there have been no serious market disruptions to date that would force policymakers to intervene.”
Walt Disney Sees Drop in Park Profits
There are more earnings reports to consider on Wednesday.
Walt Disney (NYSE) shares dropped nearly 3% after the entertainment giant reported a decline in profits from its Experiences segment, which includes parks and consumer products and accounts for just over half of its profit. Meanwhile, its Entertainment unit, which includes the combined streaming services of Disney+, Hulu, and ESPN+, posted a profit for the first time.
Shopify and Super Micro Computer
Shopify (NYSE) shares surged 17% after the e-commerce platform exceeded expectations for quarterly revenue, driven by its AI-powered tools that attracted more merchants to its services.
On the other hand, Super Micro Computer (NASDAQ) shares fell by 13% after the data center operator’s earnings for the June quarter missed estimates, raising concerns about the actual demand being generated by the artificial intelligence industry.
Airbnb Forecasts Revenue Decline
Airbnb (NASDAQ) shares dropped 14% after the house rental company forecast third-quarter revenue below estimates and warned of shorter booking windows, indicating that travelers are waiting until the last minute to book due to economic uncertainty.
S&P 500 Earnings Resilience
Citi strategists, in a note on Wednesday, stated that the resilience of S&P 500 earnings remains intact despite growing recession fears and recent negative price action. The bank’s Citi Economic Data Change index, summarizing US macro data trends, indicates further deterioration for the U.S. economy.
However, interestingly, while economic data was weak in 2022, S&P 500 earnings growth remained flat rather than severely negative, as rolling earnings recessions mitigated the overall impact on the index.
Overall, the strategists maintain confidence in their $250 EPS forecast for the S&P 500 in 2024, which is slightly higher than the current bottom-up consensus of around $243.
“But even that level of earnings, if not somewhat lower, would still represent significant improvement over 2023,” the strategists argued.
“While not locked in by any means, with Q2 reports mostly behind us and most companies essentially halfway through Q3, we struggle to see earnings expectations moving materially lower than the current consensus.”
“The bigger issue will be with 2025 earnings should a more pronounced macro slowdown unfold during the remainder of this year. But, again, we expect more resilience versus historical trends.”