Nasdaq 100 Rallies Over 4.0% on Dovish Fed/Strong Earnings, Alphabet Up 8.4%

Key Points

• The Nasdaq 100 rose over 4.0% and the S&P 500 rose 3.0% in wake of a dovish Fed policy announcement.
• The central bank raised interest rates by 75 bps as expected but noted recent economic weakness.
• Wall Street also got a boost from strong Microsoft and Alphabet earnings, with big tech/growth stocks leading the upside.

Dovish Fed Sends Wall Street Surging

Wall Street surged higher on Wednesday after the US Federal Reserve raised interest rates by 75 bps as expected, defying a minority of market participants who had been expecting a 100 bps move. Meanwhile, in his post-FOMC meeting press conference, Fed Chair Jerome Powell noted the recent softening of US economic activity and, while he reiterated that uncertainty remains very high and the Fed is taking things meeting by meeting, noted some recent positive trends regarding inflation, such as the recent pullback in commodity prices and inflation expectations.

Markets interpreted the policy decision and Powell’s remarks as dovish (or, at least, not as hawkish as feared) and US yields slumped, with the Fed interest rate expectation sensitive 2-year yield dropping 7 bps to below 3.0%. While Powell reiterated the Fed’s intention to get interest rates to 3.0-3.5% by the year’s end, his remarks did not push back against the idea that the Fed might be cutting interest rates before long in 2023.

“The Fed’s work is not yet done and we look for a further 125bp of hikes before the end of the year,” said analysts at ING in a note. “But with recession risks mounting and inflation set to fall sharply in 2023, rate cuts will be the key theme for next year,” they added.

Nasdaq 100 Rises Over 4.0%, Eyes Early June Highs

The big tech/growth stock-heavy Nasdaq 100 index rallied over 4.0% on Wednesday, its best one-day performance since the pandemic-induced volatility of early 2020. Index heavyweights Microsoft, Alphabet (Google’s parent company), Tesla, Apple, Amazon, and Meta Platforms (Facebook’s parent company) all gained between 3.0% to 8.0%.

The big tech names got an added boost from Microsoft and Alphabet earnings that were both significantly stronger than expected, with the former forecasting double-digit growth for the 2022/2023 fiscal year on strong demand for its cloud computing services and the latter posting stronger than forecast Google search ad sales.

After downbeat earnings reports from Twitter and Snap last week, there had been some concerns about weakness in the ad market. Meta Platforms will be reporting earnings after the market close and Apple and Amazon will both be reporting on Thursday.

The Nasdaq 100 index just missed out on hitting fresh highs for the month in the mid-12,600s, with the bulls again eyeing a test of early June highs above 12,800. The index’s strong rebound following Tuesday’s retest of its 50-Day Moving Average just above 12,000 is likely to be interpreted as a bullish sign by technicians.

The S&P 500 was last up around 3.0%, having broken convincingly above the 4,000 mark and to fresh one-month highs in the 4,030s. The Dow Jones was last up about just shy of 2.0%. In terms of other notable movers, PayPal’s share price jumped on news that activist investor Elliot Investment Management is building a stake in the firm, while T-Mobile’s share price was up after posting better-than-expected top and bottom line Q2 earnings and upgrading its subscriber growth forecast for the second time this year.