U.S. stocks pull back as debt ceiling fears mount

What’s driving markets

Market sentiment turned negative after president Joe Biden and House Speaker Kevin McCarthy on Monday failed to reach a deal on raising the debt ceiling after the market closed, while they struck a somewhat upbeat tone. More talks are planned.

On Monday, Treasury Secretary Janet Yellen reiterated that the U.S. won’t be able to pay all its bills by early June, and as soon as June 1, if Congress doesn’t raise the debt ceiling. One think tank’s projections Tuesday said the “X-Date” could arrive on June 2.

“The debt ceiling seems to be the only market driver,” said Stephen Innes, managing partner at SPI Asset Management.

Stresses have been building in government bond markets, pushing up short-term yields and the price of debt insurance, as traders express concern about the impact on markets should Yellen’s feared scenario come to pass.

The yield on the six-month Treasury bill
TMUBMUSD06M,
5.360%
went up Tuesday to as high as 5.41%, marking the highest level since 2000.

Meanwhile, on Monday, the Nasdaq Composite ended at its highest level in nine month, while the S&P carved out its second-highest level of 2023.

There has been a continued divergence on the performance of stocks and bonds, noted Rajeev Sharma, managing director of fixed income investments at Key Private Bank.

Treasury traders are pricing a potential default of U.S. government debt, hawkish comments from Federal Reserve officials, and a possible recession, noted Sharma. “I think the stock market is kind of doing this through a different lens and that we’ve seen this picture before, and maybe we can get through,” Sharma said.

At the same time, the economy keeps growing as inflation slowly cools though recession fears are still prevalent.

The S&P Flash U.S. services-sector index hit a 13-month high, up 55.1 in May from 53.6 in April. The S&P U.S. manufacturing sector index, meanwhile, slipped to 51 from 52.4, though it was still higher than Wall Street forecasters predicted.

New home sales climbed 4.1%, according to the Commerce Department. The 683,000 annual rate of sales in April beat expectations for 669,000.

“The market is bending but it hasn’t broke. That’s good to the updside,” said Ken Mahoney, president and CEO of Mahoney Asset Management. “If you are a bear, you’ve got be very frustrated.”

Mahoney thinks a debt ceiling deal will ultimately come in Congress and the Federal Reserve might pause its interest rate hikes at the upcoming June meeting. By and large, the first quarter earnings reporting season was rosier than some expected — and then there’s the real opportunities that lay ahead for companies using AI, he noted.

Read also: 20 AI stocks expected to post the highest compound annual sales growth through 2025

Companies in focus

• Lowe’s Companies Inc.
  LOW,
  +1.81%
  shares are up 2% Tuesday after the home-improvement retailer beat fiscal first-quarter profit and sales expectations but cut its full-year outlook, citing lower demand for discretionary items.

• Yelp Inc. shares
  YELP,
  +6.00%
  surged more than 7% after the Wall Street Journal reported an activist investor is calling on the company to consider selling to boost its value.

• RenaissanceRe Holdings Ltd.
  RNR,
  +3.25%
  shares are up more than 3% after the reinsurer said late Monday it has agreed to buy American International Group Inc.’s
  AIG,
  +4.11%
  AIG’s reinsurance businesses, which includes Validus Reinsurance Ltd. and subsidiaries as well as managed funds, for $2.985 billion.

• Zoom Video Communications Inc.’s stock
  ZM,
  -7.30%
  slipped 6.7% even as the videoconferencing company topped Wall Street expectations across the board on results and forecasts.

— Jamie Chisholm contributed to this article.