S&P 500 eyes fresh 10-month high after debt-ceiling deal

What’s driving markets

U.S. stocks were looking to start the holiday-shortened week at fresh 10-month highs as traders welcomed a deal to extend the government debt-ceiling and as optimism over AI-derived earnings continued to underpin sentiment.

“Volumes should return to normal today after the U.S. long weekend, so we should get a much better read on market trends where optimism over a U.S. debt ceiling agreement may continue to support risk assets for the early part of the week,” said Stephen Innes, managing partner at SPI Asset Management.

Some analysts were more cautious, noting Congress must still pass the deal and this uncertainty may keep a lid on ebullience.

“While the initial reaction is likely to be positive, sentiment will be tempered fact that the deal is not yet over the line, with the next hurdle being Congress where there have already been some rumbles of dissatisfaction. In any event, further developments will be keenly awaited this week as the political saga continues to unfold, and until a definitive agreement is reached, markets are likely to resume something of a holding pattern,” said Richard Hunter, head of markets at Interactive Investor.

Still, equity bulls will be hoping the S&P 500 can accelerate after finally managing on Friday to close above the 4,200 mark that had proved a stubborn top to a multi-month trading range.

Support could come from big tech stocks as investors look for more AI exposure and valuations are helped by retreating bond yields as debt ceiling angst eases, according to analysts.

The Nasdaq 100
NDX,
+2.58%,
boosted of late by the likes of AI-chipmaker Nvidia
NVDA,
+2.54%,
has jumped 30.7% so far in 2023 and sits at a more-than 12-month high.

“[W]ith the positive stock/bond correlation that has held for most of the past 18 months we will be looking for NDX to continue its rally,” said Julian Emanuel, strategist at Evercore ISI.

However, SPI’s Innes said that after the debt-ceiling relief rally, the focus could turn back on the many concerns that have kept most Wall Street analysts in a cautious mood.

“The first boat rocker could be Friday’s employment report for May which takes on immense importance as that will be the last major data point that Fed officials will have a chance to comment on before their June 14th rate decision,” said Innes.

U.S. economic updates set for release on Tuesday include the S&P Case-Shiller home price index for April, due at 9 a.m., followed at 10 a.m. by the consumer confidence reading for May.

Richmond Fed President Thomas Barkin is due to speak at at 1 p.m. Eastern.