S&P500: AI Trade Stumbles as Yields Spike on Strong Jobs Report

Strong Payrolls Beat Sinks Nasdaq

The S&P 500 Index (SPX) fell 1% on Friday. The Nasdaq Composite dropped 1.6%. The Dow Jones Industrial Average held up better, down 151 points or 0.3%. Nonfarm Payrolls came in at 172,000 against expectations of 80,000 to 85,000. April was revised higher to 179,000.

The 10-Year U.S. Treasury yield jumped above 4.5%. The 30-year U.S. Treasury yield pushed past 5%. Money markets went from 60% odds of a rate hike to 98% on one number.

Decliners outnumbered advancers more than two-to-one on both exchanges. The S&P 500 is heading for its first weekly decline since April. The Nasdaq is on pace for a 2% weekly loss. The Dow is still on track for a third straight week of gains.

Technical Analysis

The S&P 500 Index (SPX) is down. The market took out a minor bottom at 7499.72, shifting momentum to the downside.

The main trend is up. It doesn’t turn down until 7333.68 is taken out. A trade through 7620.90 reaffirms the uptrend. The key area to watch is the 50% to 61.8% area formed by this range. It’s 7477.29 to 7443.40. Since the main trend is up, look for buyers on the first test of this zone.

We could see an acceleration to the downside if 7443.40 fails as support. Furthermore, the index is in a position to post a weekly closing price reversal top. If confirmed next week, we could see the start of a 2 to 3 week correction.

172,000 Jobs Kills the Rate-Cut Trade

The Street was looking for 80,000 jobs. Goldman Sachs expected 60,000. Vanguard had 20,000. The economy added 172,000. April was revised up to 179,000. The unemployment rate held at 4.3% for a third straight month.

The labor market is not slowing. Layoffs remain low. Businesses are holding onto workers despite trade uncertainty, inflation, and Middle East tensions. Fiscal stimulus and stronger corporate profits are keeping hiring levels steady. The data that was supposed to give the Fed room to cut did the opposite. It gave the hawks more ammunition.

Rate Hike Odds Surge to 98%

Money markets priced in a 98% probability of a 25-basis-point rate hike before year-end. That was sitting near 60% before the payrolls number hit. The 10-Year U.S. Treasury yield climbed above 4.5%. The 30-year U.S. Treasury yield pushed past 5%.

Federal Reserve Chair Kevin Warsh holds his first policy meeting later this month. The conversation on the Street is no longer about when the Fed cuts. It is about whether the Fed hikes again. That shift hit growth stocks the hardest because higher yields crush the present value of future earnings and the Nasdaq is full of companies priced on exactly that math.

Chip Selloff Extends to Third Day

The Philadelphia Semiconductor Index tumbled more than 5% on Friday. That is three straight sessions of selling in the chip space. Nvidia fell 2.5%. Marvell Technology lost more than 8%. Arm Holdings declined 5%. Intel, Advanced Micro Devices, Micron Technology, and Broadcom dropped between 4.2% and 6.2%. Lam Research, Seagate Technology, and Sandisk all moved lower with them.

The AI hardware trade powered the rally from the March lows to the record highs. Two days of Broadcom fallout plus a payrolls beat that sent yields above 4.5% gave the Street every reason to keep taking profits. Technology as a whole fell 2.5% and has now declined three sessions in a row.

Citi said it is trimming equity exposure after the rally, citing inflation concerns and crowded positioning. The bank kept a constructive long-term view on U.S. equities but the near-term message was clear. Reduce risk.

Six of Eleven Sectors Hold Green

Six of eleven S&P 500 sectors traded higher despite the index dropping 1%. Consumer staples led the gainers. The money leaving technology is not leaving the market. It is going into companies with stable cash flow and less sensitivity to borrowing costs. That is the same rotation that ran the Dow to a record on Thursday. It held up on Friday even with the payrolls shock.

Stocks in the News

Lululemon sank as much as 13% after cutting its full-year earnings and revenue guidance. Current quarter outlook came in weak on top of it. ServiceTitan surged 16% after raising full-year guidance. Argan jumped 11% on a quarterly beat.

Cooper Companies gained more than 5% after earnings and revenue topped expectations. Guidewire Software tumbled 14% despite beating estimates. Docusign lost 4% on soft revenue guidance.

Chipotle Mexican Grill added 1.5% after JPMorgan upgraded the stock. Bitcoin fell below $63,000 and Strategy, Coinbase, and Robinhood all traded lower with it.

What to Watch

The 172,000 payrolls print changed the market going into next week. Rate hike odds at 98% and the 10-Year U.S. Treasury yield above 4.5% are both pressing directly on growth stocks. The chip selloff is in its third day.

Federal Reserve Chair Kevin Warsh’s first policy meeting is later this month and the data just handed him a strong labor market with inflation still elevated. U.S.-Iran talks remain stalled heading into the weekend. Higher crude oil on top of strong jobs data gives the Fed zero room to ease.

The rotation into consumer staples, financials, and healthcare held up through Friday’s selling and that money is not going back to chips until yields come down.

The S&P 500 took out the minor bottom at 7,499.72 and momentum has shifted to the downside. The first test is the 7,477.29 to 7,443.40 support zone. A weekly closing price reversal top is forming and if confirmed next week a 2 to 3 week correction could follow.

More Information in our Economic Calendar.