Dow futures fall ‘day 2’ after market rally on Powell signs of slower Fed rate hikes

Dow Jones futures fell modestly early Thursday, along with S&P 500 and Nasdaq futures, with Meta Platforms and Qualcomm reporting gains.

The stock market rally had big gains on Wednesday after the Federal Reserve raised rates by 75 basis points for a second straight meeting. Fed chief Jerome Powell signaled that policymakers are looking to slow the pace of tightening, even as the economy remains stressed and focused on inflation.

Major indexes were already moderately to strongly higher, driven by positive reactions to earnings from Microsoft ( MSFT ), Google parent Alphabet ( GOOGL ), and Enphase Energy ( ENPH ).

Sen. Joe Manchin, DW.V., announced an agreement with Senate Majority Leader Chuck Schumer Wednesday afternoon on a reconciliation bill with tax, climate and energy provisions. The deal, which could face a number of hurdles, includes a minimum corporate tax rate of 15%, drug price controls, ObamaCare subsidy increases and pro-solar and green energy Solar and fuel cell stocks were among the winners. The legislation would expand tax credits for electric vehicles, which should be good news for Tesla ( TSLA ) , General Motors ( GM ) , although there are various income and vehicle price limits on the credits.

Fed meeting

The Federal Reserve raised rates by 75 basis points on Wednesday afternoon, lifting it to a target range of 2.25%-2.5%.

The central bank downgraded its outlook for the economy slightly, noting that “spending and output have softened.” But “employment gains have been robust” while “inflation remains elevated.”

Fed chief Powell, speaking after the Fed meeting, stressed that policymakers are “strongly committed to reducing inflation.” He said the economy is “resilient” with labor markets “extremely tight.”

Powell said it will likely be “appropriate” to hold back on Fed rate hikes as they become “tighter.” He expects Fed rates to be “moderately tight” by the end of the year, which he said would be between 3% and 3.5%.

After the Fed’s rate hike and Powell’s comments, the odds of a 50 basis point move on Sept. 21 rose to 56% from about 50-50 before the Fed’s announcement . Beyond that, markets expect modest moves during the last two Fed meetings of the year, to end the year around 3.25%-3.5%.

Key gains

Meta Platforms ( META ) and Qualcomm ( QCOM ) led the key earners, with chipmaker Lam Research ( LRCX ), ServiceNow ( NOW ), O’Reilly Auto ( ORLY ), Ford Motor ( F ) and Teladoc Health (TDOC) also reported Wednesday afternoon.

Shares of meta retreated solidly after parent Facebook missed earnings, reported its first-ever revenue decline and headed to a low.

Qualcomm shares fell modestly Thursday on weak earnings guidance.

LRCX shares fell slightly after better-than-expected quarterly results.

NOW shares fell as the business software giant cut its subscription revenue guidance after slightly beating second-quarter views.

Ford stock emerged after easily beating views, with an EPS gain of 423%.

ORLY shares fell after earnings came up short and the auto parts retailer headed lower.

TDOC shares tumbled after the telemedicine specialist guided to the low end of full-year targets. Teladoc reported a big loss in the second quarter due to a large impairment charge, even though revenue beat slightly.

Meanwhile, Best Buy ( BBY ) cut its full-year forecast, citing weaker consumer spending amid high inflation. BBY shares fell modestly.

Early Thursday, Merck ( MRK ) and Pfizer ( PFE ) beat views, with Merck raising its full-year sales target and Pfizer lifting the low end of its EPS forecast. Merck shares, up about 1% early Thursday, have been trading near their 50-day line as they consolidated over the past two months. Pfizer shares, near a trending entry, rose slightly.

As of Thursday afternoon, Apple ( AAPL ) and Amazon.com ( AMZN ) are in range. Apple shares are slightly below their 200-day line after breaking above their 50-day earlier this month. Shares of AMZN are also slightly above their 50-day line.

Spirit Airlines-JetBlue offer

Spirit Airlines ( SAVE ) agreed to acquire JetBlue ( JBLU ) after finalizing its merger agreement with Frontier Group ( ULCC ) last night. This comes after months of debate, as JetBlue offered substantially more, but Spirit worried about a greater risk of antitrust rejection.

JetBlue will pay $33.50 per SAVE share in cash in the deal, which has an enterprise value of $7.6 billion. SAVE holders will receive $2.50 per share once the merger is approved, plus 10 cents per share, starting in January as the deal goes through regulatory review.

SAVE shares rose 4% to 25.26. JBLU shares rose 1%. ULCC shares fell 2%.

Dow Jones futures today

Dow Jones futures fell 0.2% to fair value. S&P 500 futures fell 0.3%. Nasdaq 100 futures lost 0.7%.

Crude oil prices rose more than 2%. Copper futures rose more than 1%.

The 10-year Treasury yield rose 4 basis points to 2.77%.

At 8:30 am ET, the Commerce Department will release second quarter GDP. Economists expect an annualized gain of 0.5%, after a 1.6% drop in the first quarter. A consecutive decline in GDP would not officially mark a recession in the United States. Economists at the National Bureau of Economic Research comment on changes in the business cycle, usually long after the fact.

Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next normal stock market session.

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Stock Exchange meeting

The stock market rallied on Wednesday, led by gains in big tech, then added to gains from the Fed’s decision to raise rates and comments from Fed chief Powell.

The Dow Jones Industrial Average rose 1.4% in Wednesday’s trading. The S&P 500 rose 2.6%. The Nasdaq composite soared 4.1%. The small-cap Russell 2000 gained 2.3%.

The price of US crude rose 2.4% to $97.26 a barrel. Natural gas futures fell 3.4%.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) rose 2.3%, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) rose 1.1%. The iShares Extended Technology Software Sector ETF ( IGV ) rose 4.3%, with Microsoft shares a major component. The VanEck Vectors Semiconductor ETF ( SMH ) rose 4.7%, with QCOM and Lam Research shares leading the way.

The SPDR S&P Metals & Mining ETF (XME) gained 3.4% and the Global X US Infrastructure Development ETF (PAVE) advanced 2.1%. US Global Jets ETF (JETS) rose 3.1%. SPDR S&P Homebuilders ETF (XHB) rose 2.1%. The Energy Select SPDR ETF (XLE) rallied 2.3% and the Financial Select SPDR ETF (XLF) rose 1.5%. The Select Health Sector SPDR Fund ( XLV ) rose 0.6%, with Pfizer and MRK leading holdings.

Reflecting more speculative stocks, the ARK Innovation ETF (ARKK) soared 6.7% and the ARK Genomics ETF (ARKG) gained 3.9%.

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Earnings goal

Revenue and earnings from Facebook parent Meta Platform came up short, and the social media giant also guided third-quarter earnings.

Shares of meta fell 4.5% in overnight trading. Shares rose 6.55% to 169.58 on Wednesday, driven by Google’s earnings and the overall market rally. META shares had sold off 13% in the previous three sessions following Snap’s ( SNAP ) weak report and guidance.

Qualcomm earnings

Qualcomm’s earnings and revenue slightly beat EPS and revenue views for the fiscal third quarter, although gross margin was a little light. The wireless chip giant also guided for fourth-quarter earnings, warning of weak smartphone sales.

Shares of QCOM sank nearly 4% in premarket trading. Shares rose 2.3% to 153.42 on Wednesday, stopping short of the 200-day line.

Analysis of market concentration

The stock market rally enjoyed big gains on Wednesday after some notable losses in recent sessions. The Nasdaq and S&P 500 recovered from near their 50-day lines.

But watch out for a second-day reaction. Major indexes also rallied after the previous two Fed meetings, but then sold off the next day.

While investors on Wednesday applauded Powell’s mildly dovish suggestions, they may focus on why the Fed’s rate hikes may begin to slow — namely, a weak economy. This makes the Q2 GDP report particularly important.

Meanwhile, a break from last week’s highs will be the next test for the major indices, followed by early June peaks.

There aren’t many stocks to buy yet. Growth stocks can break out of three-day consolidations, but often within ugly charts.

It was encouraging to see Microsoft and Google bounce back strongly despite the lack of earnings views. Tempur-Sealy (TPX) rebounded despite weak results and reduced guidance.

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what to do now

With the Fed meeting and many big gains out of the way, some of the hyper-uncertainty facing investors is fading. The market rally that has come through this news-filled week so far is definitely positive.

There could still be a “day two” Fed meeting reversal. Also, Apple and many others still report this week, along with GDP data and other key economic reports.

With a limited number of attractive stocks in position, investors may want to increase exposure through market or broad sector ETFs.

But if the market continues to improve, buying opportunities will present themselves and new positions will yield solid gains. So work on your watch lists.

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Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.