EB Daily Market Report - Wednesday, May 7, 2025
Executive Summary
- Futures were higher overnight as there was word that the U.S. and China were talking
- Action throughout this session has been relatively flat, however, which is normal for a Fed announcement day
- The announcement of no rate change is likely momentarily, but traders will be looking to see what changes the Fed makes to its policy statement language, if any
- The 10-year treasury yield ($TNX) is down 4 basis points to 4.28%
- Most commodities are lower, including crude oil ($WTIC, -1.24%), which is nearing a double bottom at $57 per barrel; today, the price is just over $58
- There's mixed sector leadership today as financials (XLF, +0.77%) lead, while materials (XLB, -0.36%) lag
- Alphabet (GOOGL, -7.68%) is began dropping just before 11am ET this morning after a report surfaced that Apple (AAPL, -1.85%) plans to integrate AI search into Safari browser
- Let's see what the Fed has to say and where we might go from here....
Market Outlook
Technology (XLK) is the most heavily-weighted sector in the S&P 500, so the benchmark index will be most impacted by the XLK. Hopefully, that makes sense. Technology represents a lot of significant revenue and EPS growers that become much more valuable in a lower interest rate environment. It's a huge reason why so many market pundits follow the Federal Reserve's every move and discussion point. Not only do lower interest rates help to spur economic growth, but those same lower interest rates also immediately increase the value of growth stocks. The following shows you the relationship between the treasury market and the stock market. Normally, money will rotate into bonds from stocks, or vice versa. When treasury bonds are sold, their corresponding yields go up. There's always an inverse relationship. Also, when treasury bonds are sold, their proceeds will many times find their way into the stock market. So, in theory, when treasuries are sold, yields AND stocks move higher together.
Check out these long-term charts of the S&P 500 and the 10-year treasury yield ($TNX):
The S&P 500 has been trending higher. Until the past few years, the TNX was trending lower. Yet, in the bottom panel showing correlation, we see many more readings above +0.50 than below -0.50. That suggests there's positive correlation between the SPX and TNX. How is that possible, however, if one is trending up and the other is trending down?
Well, over the long-term, there's a lot of NEW money coming into the stock and bond markets. That new money drives stocks higher and bond prices higher, but yields lower. So it's the new money that creates the long-term disparity in channels. Old money that rotates from bonds into stocks due to economic reasons will drive stock prices higher and yields higher as well (bond prices fall), and that's what causes the positive correlation during shorter-term periods. Remember, in the chart above, the correlation's default setting is 20 periods. So we're only comparing the stock market with treasury yields over brief, 20-week periods, which is much more tied to short-term economic conditions. It mostly ignores the long-term new money coming in.
Anyhow, I receive questions from time to time how asset class rotation impacts the stock market and I believe the above chart is about the best way to explain it.
Sectors/Industries
Since the S&P 500 low printed on April 7, the S&P 500 has rebounded several hundred points in a month, so I thought it would be a good time to show you sector and industry group leaders/laggards over the past month. Check this out:
Sectors
Industry Groups
Top 20:
Bottom 20:
ChartLists and Trading Strategies
While I'm primarily sticking to ETFs for now, if I were to venture out and begin swing trading stocks, I'd check out the Top 20 industry groups over the past month (see above) as my starting point. I'd want to trade in the direction of the trend. As long as these 20 industry groups perform well on a relative basis, I'd be looking for strong stocks within these groups for potential trading opportunities.
Upcoming Earnings
We now have our Upcoming Earnings ChartLists on our website, so be sure to check those out.
Economic Reports
FOMC announcement will be released at 2:00pm ET
Happy trading!
Tom