US stocks ended modestly higher on Tuesday as gains in most of the 11 major S&P sectors kept the S&P 500 and the Dow in positive territory, while the small-cap Russell 2000 outperformed its larger-cap peers. The Nasdaq ended the session essentially unchanged, reflecting the mixed sentiment in the market driven by AI enthusiasm and geopolitical tensions in the Middle East.
Small-cap stocks have been some of the biggest beneficiaries of the ongoing enthusiasm surrounding artificial intelligence stocks, which provided some upside muscle. The Philadelphia SE Semiconductor Index advanced on the day, while the Software & Services Index, battered in recent months over worries of AI disruption, closed in negative territory. Strong results from Hewlett Packard Enterprise and a funding commitment from Alphabet reinforced confidence in the AI buildout.
The market's muted surface belies significant underlying activity, according to Mike Dickson, head of portfolio management at Horizon Investments in Charlotte, North Carolina. "There's some massive dispersion in the whole AI infrastructure ecosystem," Dickson noted. He suggested that markets could be poised for a "heated, melt-up rally" where momentum continues to drive gains.
“There's some massive dispersion in the whole AI infrastructure ecosystem.”
Mike Dickson, head of portfolio management at Horizon Investments
Meanwhile, geopolitical tensions in the Middle East have contributed to a rise in crude prices, raising concerns about inflation and the potential for the U.S. Federal Reserve to hike interest rates by year-end. Cleveland Fed President Beth Hammack indicated that a rate hike might become necessary if inflation pressures persist. An unexpected spike in job openings, driven by the volatile professional and business services sector, added to the economic uncertainty.
Analysts are now looking to the May employment report due on Friday, which is expected to show the U.S. economy added 85,000 jobs last month, marking a monthly deceleration of 26.1%. The unemployment rate is forecast to remain steady at 4.3%.
“Markets could be in for one of these heated, melt-up rallies where the momentum keeps winning.”
Mike Dickson, head of portfolio management at Horizon Investments
Hewlett Packard Enterprise saw its shares jump after advancing its long-term financial targets by two years. Alphabet's announcement of an $80 billion equity offering to fund its AI infrastructure expansion, including an investment from Berkshire Hathaway, also highlighted the sector's growth. However, Alphabet's shares lost ground on the day.
Background
The stock market has been experiencing volatility due to a combination of factors, including enthusiasm for AI technologies and geopolitical tensions in the Middle East. The rise in crude prices and potential interest rate hikes by the U.S. Federal Reserve are also contributing to market uncertainty.
As the market navigates these mixed signals, investors will be closely watching the upcoming employment report and any developments in the Middle East that could impact inflation and interest rate expectations.
