U.S. stocks end lower, but S&P 500 scores longest weekly win streak since 2021 after Fed pause

The Dow increased for a third straight week. The S&P 500 climbed for a fifth consecutive week in its longest weekly win streak since November 2021, while the technology-heavy Nasdaq saw an eighth straight weekly advance to mark its longest stretch of gains since March 2019, according to Dow Jones Market Data.

What drove the market

U.S. stocks finished modestly lower Friday, but still scored weekly gains in the wake of the Federal Reserve’s decision to refrain from raising interest rates again on Wednesday.

“There’s a lot of cash on the sidelines” as investors have been earning around 4% to 5% interest rates from Treasury-bills or certificates of deposits while worrying about a recession, said Saira Malik, chief investment officer at Nuveen, in a phone interview Friday. “I’ll call 2023 the most talked about recession that never happened,” she said, and now “there’s a bit of FOMO going on.”

The S&P 500 index has risen 2.6% this week, bringing its gains so far this year to almost 15%, according to FactSet data. And the technology-heavy Nasdaq has surged nearly 31% in 2023.

Stocks continued climbing after the Fed the announced on Wednesday that it paused its interest-rate hikes, but the central bank’s summary of economic projections showed that two more rate increases may follow this year as it continues its effort to bring high inflation down to its 2% target.

“A pause in rate hikes is good for equity markets,” said Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, in a phone interview Friday. It’s a “little bit of a sigh of relief” for markets, even with projections for potentially two more rate hikes in 2023, as it signals the Fed is nearing the end of its hiking cycle, he said.

But there’s “still looming risk of an earnings slowdown,” Hetts cautioned, saying that now favors a defensive slant toward high-quality large-cap stocks with earnings resilience. But against the backdrop of a slowing economy, he said he also likes some exposure to profitable small- and mid-cap companies to position for gains after a potential U.S. recession.

On Friday investors were weighing remarks by a pair of Fed officials.

Richmond Fed President Tom Barkin said Friday that inflation is still too high and he needs to be convinced it’s slowing more quickly before he would back an end to rate increases. Fed Gov. Christopher Waller said on the same day that the fallout from several bank failures in the spring is likely to continue to play a role in the central bank’s decision on how much to raise rates.

On Tuesday, data from the consumer-price index showed inflation in May eased to a year-over-year rate of 4%, the lowest level since March 2021.

“U.S. stocks are ready for a long weekend as traders are exhausted from a week filled with high impact events that didn’t derail momentum in equities,” Edward Moya, senior market analyst at Oanda, wrote in a note. “This stock market rally seems a bit overextended but too much money remains on the sidelines, which means if the AI trade remains intact, this winning streak for mega-cap tech stocks can last a while longer.”

Global strategists at Citi say the S&P 500’s nearly 15% gain this year being led by big megacap tech companies isn’t a reason to be pessimistic. “Ultimately, bad breadth alone is not a reason to sell the market. In fact, stocks are usually higher 12 months after leadership narrows,” the strategists said.

In U.S. economic data Friday, consumer sentiment rose in June to a four-month high of 63.9 as inflation eased and the U.S. debt-ceiling fight ended, according to an index produced by the University of Michigan. The consumer-sentiment index is up from 59.2 in May.

Meanwhile, consumers’ inflation expectations came down, the University of Michigan survey found. Americans think inflation will average 3.3% in the next year, down from 4.2% in the May survey. Looking out over the next five years, consumers believe inflation will average about 3% annually.

“Today’s data probably won’t impact the chances of a July hike. The levels of inflation expectations are too high, but the pace of change is encouraging,” said Thomas Simons, money-market economist at Jefferies, in a note.

Read: Big stock market rally to be followed by ‘big collapse,’ says BofA’s Hartnett

Companies in focus

• Virgin Galactic Holdings
  SPCE,
  +16.50%
  shares soared 16.5% after the space-travel company said it would begin offering commercial space flights this month.

• IRobot Corp.
  IRBT,
  +21.20%
  stock jumped 21.2% after the U.K. Competition and Markets Authority said it has cleared Amazon.com Inc.’s
  AMZN,
  -1.27%
  proposed $1.7 billion acquisition of the U.S. technology company.

• Adobe Inc.
  ADBE,
  +0.87%
  rose 0.9%, after the desktop publishing pioneer reported record quarterly revenue of $4.82 billion and forecast solid sales for its current quarter.

• Shares of Cava Group
  CAVA,
  -12.86%,
  the Mediterranean-focused fast-casual restaurant chain, retreated 12.9%, following Thursday’s Wall Street debut that saw shares open 90% above the initial public offering price. The stock finished 99% higher at $43.78 on Thursday.