Debt Deal Sparks Rally

The successful denouement of the debt-ceiling saga and good tidings from updated employment data fueled a broad rally Friday, giving the Dow Jones Industrial Average (DJIA) its biggest gain since November and leaving the Nasdaq Composite ($COMPX) its highest level in more than a year.

Late Thursday, the Senate approved legislation that suspends the debt ceiling until 2025, ending a political standoff that would have led to an unprecedented default on the federal debt. President Biden is expected to sign the bill into law.

Adding to the cheer was a Labor Department report showing nonfarm payrolls grew by 339,000 in May, blowing way past the 190,000 analysts had expected and alleviating some of the recession concerns brewing in the markets. But the strong headline number wasn't the only reason to applaud. Average earnings slipped and the unemployment rate ticked higher, suggesting the Federal Reserve's sharp interest rate hikes have eased some of the inflation-boosting tightness in the labor market. Schwab Chief Investment Strategist Liz Ann Sonders says the report offered a mixed picture. As a result, the market is no longer so certain interest rates may be at their peak level, as reflected in futures prices, but investors still "appear to be taking solace" in the possibility the Fed will at least keep rates unchanged at its policy meeting on June 13–14. Here is where the major benchmarks ended:

The S&P 500® Index (SPX) was up 61.35 points (1.5%) at 4282.37, near a 10-month high; the Dow Jones industrial average was up 701.19 (2.1%) at 33,762.76; the Nasdaq Composite was up 139.78 (1.1%) at 13,240.77.
The 10-year Treasury note yield (TNX) was up about 9 basis points at 3.695%.
Cboe's Volatility Index (VIX) was down 1.07 at 14.58.

Financial companies were among the strongest performers Friday, with the KBW Regional Banking Index (KRX) rising more than 6%. Oilfield services companies and others in the energy sector were also strong, as crude oil futures extended a recent rally above $70 per barrel. Volatility measures dropped as the debt ceiling deal removed a source of uncertainty, with the VIX hitting its lowest level since July 2021.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Stocks on the move

The following companies reported quarterly results over the past day or had large, news-driven stock price moves:

AT&T (T) and other wireless phone service companies were pressured by a Bloomberg News report that Amazon (AMZN) is considering offering wireless service to its Prime members. AT&T shares fell 3.6%, while T-Mobile (TMUS) was down 6.5% and Verizon (VZ) dropped 3%.
Broadcom (AVGO) late Thursday reported quarterly results that surpassed Wall Street expectations, helping boost the chipmaker's shares 3%. The stock also benefited from Broadcom's recent deal to develop wireless connectivity components with Apple (AAPL). Separately, investors will be watching Apple's Worldwide Developers Conference, which begins Monday, for product announcements or iPhone updates. Apple shares were up about 0.5%.
Five Below (FIVE) posted quarterly earnings of 67 cents per share, about 4 cents above expectations, though its revenue of $726 million and guidance for the current quarter were both under forecasts. Shares of the discount retailer still rose nearly 8%.
PagerDuty's (PD) quarterly earnings topped Wall Street expectations, but the digital operations management company also provided lower-than-expected revenue guidance. Its shares plunged 17%.
Lululemon (LULU) late Thursday reported earnings that exceeded expectations and said comparable-store sales surged 14%. Its shares rose more than 11%.
MongoDB (MDB) topped earnings expectations and forecast stronger-than-expected revenue guidance for the current quarter. Shares of the database software company soared nearly 28%.
Xcel Energy (XEL) was downgraded by JPMorgan Chase, which cited lower electricity costs in Minnesota from state regulators. Its shares fell about 0.6%.

Jobs updateFriday's solid jobs report added to the recent trend of analysts misjudging the strength of the U.S. labor market. In addition to May's strong numbers, the Labor Department also raised its estimates for March and April payroll growth by a combined 93,000.

However, the report also deserves a few caveats, says Schwab Chief Fixed Income Strategist Kathy Jones.

Average hourly earnings in May rose 0.3% from April, slowing from the 0.5% increase the month before. Unemployment rose to 3.7%, which was slightly higher than the 3.5% economists were expecting. Also, the average workweek fell near the lows of the past decade, and the Labor Department's household survey revealed job losses.

The big question is whether the jobs data will compel the Fed to raise rates again at its policy meeting later this month, Kathy says.

"With job growth still exceeding expectations, it keeps the potential for a Fed rate hike at the June meeting alive and reduces the likelihood of rate cuts later this year," Kathy says. "We'll have to see how inflation data turn out. That's the next hurdle for the market. Plus, there will likely be some 'Fedspeak' over the next week, giving hints about the Fed's next move."

Late Friday, the odds of the Fed leaving rates unchanged in June were about 71%, up from 36% a week ago, according to the CME FedWatch tool.

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Debt Deal Sparks Rally

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