The AI Stock Rally Screeches to a Halt. It’s Back to Reality for Markets.

Software maker C3.ai highlighted the perils of such an intense rally. The stock climbed 125% in May alone, and is more than 250% up so far this year. It just couldn’t live up to the hype as its earnings outlook fell short of expectations–the stock tumbled 20% in after-hours trading and was down in the early Thursday premarket.

Nvidia, the poster child of the AI boom, also headed back down to Earth after temporarily hitting an intraday market capitalization of $1 trillion earlier this week. The chip maker’s stay in that exclusive club looks set to be a brief one, as its value dropped back to $934 billion Wednesday.

ARK Invest’s Cathie Wood certainly thinks the company’s fleeting dalliance with that milestone is as good as it’s going to get. One of her funds sold more Nvidia stock Wednesday.

Investors could be forgiven for ignoring that, though, given Wood’s timing on Nvidia trades. Her flagship fund exited its position in the stock between November and January, missing the recent surge.

She’s still an AI-believer, though, scooping up more shares in automation software company UiPath.

If AI-focused stocks are done dragging markets higher for now, it leaves the major stock indexes exposed to more rudimentary matters, such as Friday’s jobs report. The data could be key in cementing, or reversing, expectations for a Federal Reserve pause later this month.

—Callum Keown

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Economic Impact from Debt Ceiling Deal Will Be Limited

Congress’ 11th-hour deal to lift the nation’s $31.4 trillion debt ceiling in exchange for spending cuts and policy freezes will stabilize financial markets and avert the potential economic disaster of a default, but the economic impact of the spending agreement will be marginal at best.

• Democrats and Republicans passed the bill during an evening vote on Wednesday, sending it to the Senate for what is expected to be an expedited vote ahead of the June 5 date when Treasury Secretary Janet Yellen said the government will run out of options to pay its bills.

• Morgan Stanley economists estimate the drag on the U.S. economy from the deal’s spending reductions will be “at most…a couple of tenths off GDP growth in 2024.” Moody’s economist Mark Zandi forecast it would cause a 0.1 percentage-point rise in the current 3.4% unemployment rate.

• JPMorgan analysts estimate the agreement would have roughly the same impact on aggregate demand as a quarter-point rise in the federal-funds rate. “Limited macro impact,” wrote Gregory Daco, chief economist with EY-Parthenon, “beside avoiding a self-inflicted catastrophe.” The biggest win is raising the debt ceiling until January 2025, they noted.

• The nonpartisan Congressional Budget Office estimates the deal will reduce budget deficits by $1.5 trillion over 10 years. The savings amount to about $4.4 billion in fiscal year 2023 and $69.5 billion in fiscal 2024, Morgan Stanley estimates—or roughly 0.27% of GDP in fiscal 2024.

What’s Next: The CBO’s headline estimate is based on a 10-year horizon, but after the $97 billion reduction in federal outlays CBO is projecting for fiscal years 2024 and 2025, spending caps will become largely “unenforceable,” wrote Joe Brusuelas, chief economist with RSM US.

—Megan Cassella and Janet H. Cho

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Fed Could Skip June Hike But Raise Rates Later

Two Federal Reserve officials signaled a preference to hold interest rates steady at their June 13-14 meeting before preparing to raise them again later this summer. The policy makers said they would rather not hike rates, barring a hotter-than-expected jobs report on Friday.

• That would allow more time to consider the impact of the Fed’s previous 10 consecutive rate increases since March 2022 to fight high inflation, including its May 3 increase to a range between 5% and 5.25%, a 16-year high.

• Fed governor Philip Jefferson cautioned that holding the rate constant in June “should not be interpreted to mean that we have reached the peak rate for this cycle.” Rather, it would enable officials to consider more data before deciding on additional policy firming, he told a conference in Washington.

• Philadelphia Fed President Patrick Harker also supports holding rates steady in June, saying that if more tightening is required, “we can do that every other meeting.” Fed Chairman Jerome Powell on May 19 said: “We can afford to look at the data and the evolving outlook.”

• Futures traders began expecting another rate increase last week after strong consumer spending in April. But that view was reversed on Wednesday. The CME’s FedWatch tool now reflects a 70% probability of a June pause since Jefferson and Harker spoke.

What’s Next: Wednesday’s comments come just days before the Fed’s traditional quiet period begins. Investors see a 65% chance that the Fed would raise rates at least once by July. That would move up the median projection of the peak rate to around 5.4%, a 22-year high, The Wall Street Journal reported.

—Janet H. Cho

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Tech Stocks Fall Despite Optimism from Salesforce, Okta

Salesforce
predicted record adjusted earnings in the second quarter after beating expectations in the first quarter, and increased its guidance for record profit for the full year. But the stock slid more than 4% in after-hours trading.

• Salesforce received a boost from activist-investor activity and CEO Marc Benioff’s pivot from focusing on revenue growth to expanding profit margins with layoffs and other cost cuts. Benioff’s promise of record profit comes amid a weaker outlook for corporate spending.

• Online security firm
  Okta
  is forecasting better-than-expected results for the second quarter and raised its full-year guidance, but the CEO Todd McKinnon told MarketWatch macro conditions could worsen. Shares fell 16% after hours.

• Despite artificial intelligence being the hottest topic in tech these days, shares of
  C3.ai
  fell nearly 22% in after-hours trading on soft annual revenue guidance. The AI firm reported a narrower-than-expected adjusted fourth-quarter loss on better-than-expected revenue.

• C3.ai’s CEO Tom Siebel said there is broad consensus that the addressable market for enterprise AI is large and rapidly growing. He told analysts about a few contracts the firm has landed with the Defense Department.

What’s Next: C3.ai’s fiscal 2024 revenue guidance of $295 million to $320 million was on the light side of analysts’ estimates of $317 million. The company also said it is on track for its previously stated goal to be profitable on an adjusted basis by the end of fiscal year 2024.

—Liz Moyer and MarketWatch

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Chevron Gets Two Upgrades in Two Days, Boosting Stock

Chevron got a second upgrade from analysts in as many days, with both sets of analysts saying the oil and gas company is a good defensive option. The stock was up in the early Thursday premarket.

• Strategists at RBC led by Biraj Borkhataria lifted their price target for Chevron (ticker: CVX) to $180 from $165 and raised their rating for the stock to Outperform. On Wednesday, J.P. Morgan analysts upgraded the shares to Neutral from Underweight with a price target of $170.

• Chevron’s stock has struggled this year after the company reported record profits in 2022, when Russia’s invasion of Ukraine sent crude prices soaring. Oil prices have since fallen back, denting the outlook.

• Oil prices have been hit by the Federal Reserve’s aggressive interest-rate increases over the past year, though there’s some hope they will pause the campaign at the June 14 meeting.

What’s Next: RBC and J.P. Morgan said Chevron’s emphasis on upstream production and its strong balance sheet leave it well positioned for any volatility in the oil market ahead.

—Brian Swint and Karishma Vanjani

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Target Shares Notch Longest Losing Streak in 23 Years

Target
stock closed down for its ninth consecutive day after the retailer faced a backlash over some of its merchandise promotions tied to Pride Month. That makes it Target’s longest losing streak in 23 years, according to Dow Jones Market Data.

• Target’s stock fell 2.2% on Wednesday, dropping 17% over the past nine days. A Target representative could not be reached for comment. Target is facing slowing sales as shoppers spend less on discretionary items. Boycott threats also pressured it to remove some Pride-related merchandise.

• People are apparently still spending on their pets, though.
  Chewy
  shares jumped 13% in after-hours trading after the pet-supply retailer reported a surprise first-quarter profit and forecast full-year sales to rise 10% to 12% from the previous year.

• Elsewhere in the sector,
  Walmart
  investors voted against nine shareholder-led proposals at its annual meeting on Wednesday, including one that asked it to disclose its exposure to China and one asking for an independent review of its safety practices related to gun violence.

• Separately,
  Nordstrom
  beat first-quarter earnings and sales expectations, sending its stock soaring 10% in after-hours trading. The upscale department-store chain reported adjusted earnings of 7 cents a share on sales of $3.2 billion, and reaffirmed its fiscal 2023 outlook.

What’s Next: For fiscal 2023, Nordstrom expects revenue to decline 4% to 6%, and adjusted earnings per share of $1.80 to $2.20, in line with Wall Street’s estimates for $1.87 a share. CEO Erik Nordstrom said the company was “encouraged by our momentum,” especially in light of the uncertain economy.

—Janet H. Cho and Sabrina Escobar

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner