Stocks closed lower Tuesday after Fed Chair Jerome Powell warned Congress that higher interest rates were needed to combat nagging inflation and bellwether FedEx (FDX) disappointed Wall Street with its 2024 profit outlook.
In the first of two days of the Fed chief's semi-annual testimony before Congress, Powell reiterated the central bank's view that more interest rate increases will be necessary to curb inflation.
"Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," Powell said in a prepared statement to the House Financial Services Committee.
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Last week the Fed's rate-setting committee, the Federal Open Market Committee (FOMC), left the short-term federal funds rate unchanged at a target range of 5.0% to 5.25%. The so-called hawkish pause broke a streak of 10 consecutive rate hikes, but the FOMC left the door open to two more quarter-point increases later this year – a stance Powell confirmed on Tuesday.
"We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks," the Fed chief told Congress.
Powell will deliver a similar report to the U.S. Senate Banking Committee on Thursday.
In single-stock news, logistics giant FedEx offered a 2024 profit forecast that came in below analysts' average estimate. Although the delivery company is slashing costs rapidly, demand for global shipments has been waning amid macroeconomic uncertainty. FedEx said it expects adjusted earnings per share (EPS) to come in between $16.50 to $18.50 a share for fiscal 2024, short of analysts' average estimate of $18.31.
Elsewhere, the prospect of higher interest rates took a toll on mega-cap technology stocks, which have been soaring this year thanks to the promise of generative artificial intelligence (AI).
Nvidia (NVDA) stock has nearly tripled so far in 2023, but it fell 1.7% on Tuesday. Other mega-cap tech names that have been driving this year's rally also took steps back. Microsoft (MSFT) declined 1.3%, Google parent Alphabet (GOOGL) retreated 2.1% and Apple (AAPL) lost 0.6%.
At the closing bell, the Dow Jones Industrial Average was off 0.3% to settle at 33,951, while the broader S&P 500 shed 0.5% to 4,365. The tech-heavy Nasdaq Composite declined 1.2% to finish at 13,502.
Don't fear narrow breadth
Doubters of this year's remarkable rally in equities like to say that the market's gains are being driven by "only five stocks." And, yes, there's something to this. The S&P 500 is weighted by market capitalization, meaning that larger stocks have more influence on the direction of the index than smaller ones.
When you have multiple stocks with market caps of more than a trillion dollars, well, they really do move the needle when they're all headed in the same direction. The S&P 500's five biggest stocks – Apple, Microsoft, Amazon.com (AMZN), Nvidia and Google parent Alphabet – collectively have a weighting of more than 22% in the S&P 500.
If nothing else, Tuesday's pullback reminded investors of how important the S&P 500's largest stocks by market capitalization are to the direction of the index.
And that has bears worried. Markets driven by a small number of stocks are fragile, they say. When broad market gains are driven by "narrow breadth," those gains can too often prove to be fleeting, is the concern.
But as we noted recently, history shows that narrow breadth is the market's natural state of being: a small number of stocks always drive most of the market's returns.
While there are reasons to worry about the nascent bull market losing its footing, the rally in mega-cap tech names probably isn't one of them.
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