Key Takeaways
- U.S. stock indices showed mixed performance on Monday, with the S&P 500 and Nasdaq 100 seeing gains while the Dow Jones Industrial Average declined.
- Market sentiment was influenced by significant M&A activity, including OpenAI’s substantial AI computing purchase from Amazon and Kimberly-Clark’s acquisition of Kenvue.
- Dovish remarks from Fed Governors contrasting with slightly hawkish comments from Chicago Fed President Goolsbee added complexity to monetary policy expectations.
- Economic data, including the ISM manufacturing report and S&P US manufacturing PMI, provided mixed signals, while upcoming Supreme Court arguments on tariffs add another layer of uncertainty.
- Despite a generally strong Q3 earnings season, forward-looking profit and sales growth projections indicate a potential slowdown.
Market Performance Snapshot
On Monday, the S&P 500 Index closed up by 0.10%, while the Nasdaq 100 Index saw a gain of 0.37%. Conversely, the Dow Jones Industrials Index experienced a slight downturn, falling by 0.52%. December E-mini S&P futures edged up by 0.09%, and December E-mini Nasdaq futures rose by 0.35%.
Driving Factors for Market Movement
US stocks found support on Monday primarily from optimism surrounding artificial intelligence, notably following OpenAI’s agreement to acquire $38 billion in AI computing power from Amazon. This significant tech-related transaction underscored the growing importance of AI infrastructure in the market.
Mergers and acquisitions also played a crucial role in market dynamics. Kimberly-Clark announced a substantial $40 billion acquisition of Kenvue, the maker of Tylenol, in a deal involving both stock and cash. Additionally, Eaton’s agreement to purchase Boyd’s thermal business for $9.5 billion highlighted activity within the data center sector.
💡 Comments from Federal Reserve Governors offered a mixed outlook on monetary policy. Fed Governor Stephen Miran suggested that current Fed policy is overly restrictive, stating that neutral policy rates are significantly lower than the current stance. He indicated that his more optimistic view on inflation lessens the need for continued restrictive policy.
Fed Governor Lisa Cook also leaned towards a dovish perspective, acknowledging a greater risk of labor market weakness than rising inflation. However, she refrained from committing to a December interest rate cut and emphasized that monetary policy is not on a predetermined path.
Conversely, Chicago Fed President Austan Goolsbee presented a slightly more hawkish tone, expressing greater concern about inflation compared to the job market. While he noted that interest rates could still decrease considerably, he suggested it would be most prudent for rate reductions to align with declining inflation. He remains undecided on policy for the upcoming December FOMC meeting.
📊 The market currently discounts a 66% probability of a 25 basis point rate cut at the next FOMC meeting scheduled for December 9-10.
The bond market showed some pressure, with the 10-year U.S. Treasury note yield increasing by 2.5 basis points, which acted as a headwind for stocks.
Economic Data Insights
The October ISM manufacturing index reported a decline, falling by 0.4 points to 48.7, which was below the expected increase to 49.5. This marks the eighth consecutive month the index has remained below the 50.0 expansion-contraction threshold.
On a more positive note, the October ISM prices paid index decreased by 3.9 points to 58.0, falling short of the anticipated 62.5. This indicated a moderation in inflationary pressures within the manufacturing sector.
✅ The final reading of the S&P US manufacturing Purchasing Managers’ Index (PMI) for October was revised upward slightly to 52.5, exceeding market expectations of 52.2 and signaling continued expansion in the manufacturing sector.
Upcoming Legal and Corporate Events
Investors are looking ahead to the Supreme Court’s oral arguments this Wednesday concerning the legality of President Trump’s reciprocal tariffs. The arguments may offer insights into the potential outcome of the ruling, which is expected by the end of the year or early 2026.
Lower courts have previously deemed these tariffs illegal, citing a questionable claim of emergency authority under the International Emergency Economic Powers Act of 1977. A Supreme Court decision upholding these rulings could necessitate the refund of over $80 billion in collected tariffs and may restrict the executive branch’s future ability to impose tariffs outside established trade law provisions.
⚡ The third-quarter corporate earnings season continues this week, with 136 S&P 500 companies scheduled to report. Data from Bloomberg Intelligence suggests that 80% of companies that have reported thus far have exceeded earnings forecasts, pointing towards the strongest quarterly performance since 2021.
However, despite the positive earnings surprises, Q3 profits are projected to have grown by 7.2% year-over-year, the smallest increase in two years. Furthermore, Q3 sales growth is expected to moderate to 5.9% year-over-year, down from 6.4% in the second quarter.
📍 The ongoing US government shutdown, now in its sixth week, continues to exert pressure on market sentiment and the broader economy. The shutdown is causing delays in the release of various government reports, negatively impacting economic activity.
Global Market Overview
International stock markets closed higher on Monday. The Euro Stoxx 50 index rose by 0.30%, China’s Shanghai Composite gained 0.55%, and Japan’s Nikkei Stock 225 saw a significant increase of 2.12%.
Interest Rate Developments
December 10-Year T-Notes
December 10-year T-notes experienced a modest rise of 0.5 ticks on Monday. The yield on the 10-year Treasury note increased by 2.3 basis points to 4.101%. Support for T-note prices emerged from the weaker-than-expected October ISM manufacturing report released earlier in the day, as well as a decline of 0.7 basis points in 10-year breakeven inflation expectations to 2.309%.
However, T-note prices also faced bearish pressure stemming from Federal Reserve Chair Powell’s cautious remarks last week regarding the likelihood of another rate cut at the December 9-10 FOMC meeting. Several other Fed officials also expressed caution about further rate cuts. Despite this, dovish comments from Fed Governors Miran and Cook on Monday provided some underlying support.
The ongoing US government shutdown is seen as a potential underlying support for T-note prices, as it could lead to increased job losses, reduced consumer spending, and a general economic slowdown, potentially prompting the Fed to maintain a more accommodative monetary policy stance.
European Bond Yields
European government bond yields rose on Monday. The 10-year German bund yield increased by 3.4 basis points to 2.667%, while the 10-year UK gilt yield climbed by 2.5 basis points to 4.435%.
💰 Swaps indicate a 5% probability of a 25 basis point rate cut by the European Central Bank (ECB) at its next policy meeting on December 18.
Notable Movers in US Stock Markets
Magnificent Seven Performance
The Magnificent Seven stocks closed mixed on Monday. Meta stood out as the largest decliner, falling by 1.6%. Amazon experienced a significant rally of 4.0% following the announcement of its $38 billion deal with OpenAI for AWS cloud AI capacity. Nvidia rose by 2.2% after Loop Capital Markets set a new Street-high price target, implying a market capitalization exceeding $8.5 trillion.
Alphabet saw a gain of 0.9% after reports indicated the company plans to raise $15 billion through a dollar bond sale across various maturities.
Dow Jones Industrial Average Movers
The Dow Jones Industrial Average declined 0.52% on Monday, characterized by negative market breadth, with 22 stocks falling for every 8 that gained. Major losers in the Dow included Merck, down 4.1%, and NIKE, down 3.0%. 3M, Chevron, and UnitedHealth Group also registered losses exceeding 2%.
Cryptocurrency Stocks
Crypto-related stocks traded lower due to a 2.6% sell-off in Bitcoin. Coinbase fell 3.9%, Mara Holdings dropped 2.5%, and MicroStrategy (MSTR) declined by 1.8%. Riot Platforms was an exception, closing up 4.8%.
Sector and Individual Stock Highlights
IREN LTD rallied over 11% after Microsoft announced a nearly $10 billion deal to purchase AI cloud capacity from the data center company.
Kenvue shares surged 12% following Kimberly-Clark’s agreement to acquire the consumer health company for nearly $50 billion. However, investors reacted negatively to the news for Kimberly-Clark, which plunged over 14%.
Cisco Systems rose 1.8% after receiving an upgrade to buy from neutral by UBS.
Eaton gained 1.3% after agreeing to purchase Boyd Corp’s thermal business for $9.5 billion, a move aimed at strengthening its data center solutions.
Final Thoughts
Monday’s market session was a complex interplay of AI-driven optimism, significant M&A news, and mixed economic signals. Investors are carefully evaluating the Federal Reserve’s monetary policy trajectory amidst evolving inflation and employment data.
The upcoming earnings reports and Supreme Court tariff decision add further layers of anticipation and potential market movement in the near term.