Stock Market Rallies as Investors Focus on Interest Rates and AI

The US stock market is experiencing a rally on Friday, May 3, 2024, following a government report showing modest job growth in April. The S&P 500 is up 1.3%, the Dow Jones Industrial Average has gained 468 points (1.2%), and the Nasdaq composite has added 2.1%. The rally is erasing losses for the week, as investors focus on interest rates and the ongoing artificial intelligence (AI) fueled rally in the technology sector.

Why this matters: The stock market's performance has a direct impact on the overall economy, influencing consumer spending and business investment decisions. As interest rates and AI technology continue to shape the market, their effects will be felt beyond the financial sector, impacting the broader economy and individual investors.

The nation's employers added 175,000 jobs in April, down sharply from the 315,000 increase in March and below the 233,000 gain predicted by economists. Average hourly earnings also rose less than expected. This suggests that the Federal Reserve's aggressive rate hikes may be cooling the pace of hiring. Treasury yields in the bond market mostly fell following the jobs report. The yield on the 10-year Treasury eased to 4.5% from 4.59%, while the two-year yield fell to 4.81% from 4.88%.

Federal Reserve Chair Jerome Powell said on Wednesday that it will likely take "longer than previously expected" to get enough confidence about inflation to cut interest rates. However, the jobs report data may give the Fed some leeway to cut rates later this year, according to Jeffrey Roach, chief economist for LPL Financial. "The demand for labor is slowing, which will eventually ease inflation pressures, giving the Fed some leeway to cut rates later this year," Roach noted.

Technology stocks accounted for much of the rally, with Apple jumping 7.2% after announcing a $110 billion stock buyback. Microsoft rose 2.1%, and Nvidia added 3.6%. The semiconductor-focused fund, Direxion Daily Semiconductor Bull 3X Shares (SOXL), has experienced significant gains over the past year, despite recent volatility. On Thursday, SOXL jumped 6% amid a wider rally in tech stocks, following mildly optimistic remarks by Powell. The fund seeks three times daily exposure from an index of 30 of the largest U.S.-listed semiconductor companies.

The semiconductor sector has struggled recently as many investors took profits, including a sell-off of semiconductor stocks. Nvidia, the AI chip manufacturing giant, has fallen 3.5% over the past month to trade at $858 per share, after hitting an all-time high over $950 less than six weeks ago. Advanced Micro Devices (AMD) has plunged more than 19% since early April, despite rising more than 1% on Thursday. AMD's Q1 2024 revenue was $5.47 billion, with net income of $123 million. The company's Data Center segment revenue rose 80% year-over-year to $2.3 billion, driven by surging demand for AI applications.

In Europe, Germany's DAX gained 0.6%, while the CAC 40 in Paris rose 0.5% and London's FTSE 100 added 0.5%. Markets in Tokyo and mainland China were closed for holidays. The Japanese yen strengthened slightly against the dollar. As the stock market continues to rally, investors will be closely watching interest rates and the ongoing AI-fueled growth in the technology sector. The jobs report has dampened the narrative of prolonged high interest rates, and traders are now largely betting on just one or two interest rate cuts in 2024, if any.

Key Takeaways

• US stock market rallies on Friday, May 3, 2024, with S&P 500 up 1.3%.
• Modest job growth in April suggests Fed's rate hikes may be cooling hiring pace.
• Treasury yields fall, with 10-year yield easing to 4.5% from 4.59%.
• Technology stocks drive rally, with Apple up 7.2% and Nvidia adding 3.6%.
• Jobs report data may give Fed leeway to cut rates later this year.