Daily market snapshot

• Stocks close lower: Equity markets finished lower, reversing gains from earlier this morning, as the S&P 500 posted a daily decline for the fourth consecutive day. The S&P 500 shed roughly 0.6%, while the technology-heavy NASDAQ declined by over 1%. At a sector level, leadership struck a defensive tone, with defensive sectors, such as utilities and consumer staples, among the top performers of the S&P 500, while technology lagged, shedding about 1.7%.* The technology sector was pressured by disappointing guidance from semiconductor equipment manufacturer ASML in its first-quarter earnings report.* Overseas, European markets finished mostly higher despite a higher-than-expected U.K. inflation reading.* Treasury yields finished lower, with the 10-year yield ticking down to 4.58%, although the 10-year yield has risen nearly 0.3 percentage points month-to-date in response to higher-than-expected inflation data.* Despite elevated geopolitical concerns, oil prices declined for the third consecutive day, closing at around $83 per barrel.
• Earnings check-in: First-quarter earnings are underway, with roughly 10% of the S&P 500 having reported thus far. Expectations are for S&P 500 earnings to grow by about 1% year-over-year in the first quarter, down from an estimated 3% growth rate at the end of March.* Looking ahead to the full year, expectations are for earnings to grow by roughly 10% year-over-year in 2024, with the information technology, communication services and financials sectors expected to see the strongest growth.* With the S&P 500 rallying over 20% in 2023 while earnings growth was roughly flat on the year, much of last year's gain was attributable to valuation expansion. We see limited scope for current valuations to meaningfully expand, and therefore we believe healthy corporate earnings growth will be a key ingredient for stocks to continue to perform well for the remainder of the year.
• Second quarter off to a slow start: After rallying by over 10% in the first quarter, returns in the month of April have been less appealing for the S&P 500, with the index lower by about 4.4%.* Each sector has moved lower for the month except communication services, which has posted a gain of less than 1%. Performance of investment-grade bonds has been lackluster as well, with the Bloomberg U.S. Aggregate Bond Index lower by nearly 3% month-to-date.* Hotter-than-expected U.S. inflation has driven the 10-year Treasury yield nearly 0.3 percentage points higher month-to-date and has been a contributing factor to the pullback in stocks and bonds this month. Elevated geopolitical risks stemming from the Israel-Iran conflict have further contributed to risk-off sentiment in equity markets in recent days. We'd remind investors that market pullbacks are normal, and on average the S&P 500 experiences about three 5% pullbacks per calendar year.** We believe the outlook for equity markets is constructive, and we recommend investors use pockets of volatility to add to quality investments in line with their financial goals.

Brock Weimer, CFA
Associate Analyst 

^{*FactSet
**FactSet, Edward Jones.} 

• Equities search for footing with focus on rates and geopolitics – The risk-off mood appeared to linger somewhat on Tuesday, with stocks closing slightly to the downside following Monday's 1% decline. Geopolitical uncertainties in the Middle East remain a contributor, as does the ongoing adjustment to the likelihood that the Fed will need to wait longer until it cuts rates. On the other hand, earnings results released Tuesday morning from UnitedHealth and Bank of America topped estimates, offering some help to the major U.S. indexes, as the positive outlook for corporate earnings remains a pillar of market support. The S&P 500 finished the day off by 0.2%, while the Dow added 64 points, thanks to a boost from the gain in UnitedHealth shares. The health care and consumer staples sectors were among the leaders today, alongside a notable gain in gold prices, reflecting an element of defensiveness to the day's moves.* Despite uncertainties around supply given the situation with Iran, oil prices closed slightly lower on Tuesday, as markets reflect the potential for some OPEC+ spare capacity to come online if production is impacted by the conflict between Iran and Israel.
• Return of rising rates – Bond yields were up again today, with the 10-year Treasury rate above 4.65%, touching its highest since last November.* Hotter-than-expected inflation readings and still-strong economic data are behind the move, as markets have recalibrated expectations for Fed policy moves over the balance of the year. Several Fed officials were on the speaking trail today, which received some extra attention as investors search for further clues on how policymakers are digesting the latest round of inflation data. While the Fed's last meeting yielded a pause on rates and an acknowledgement that rate cuts are still in the cards, commentary from Fed officials emphasized that they are in no hurry to ease policy until they see further, persistent evidence that CPI is headed lower. The move higher in bond yields has been sharp, but we don't think this reinstitutes a prolonged phase of rising interest rates. Instead, we view this as an adjustment to the new Fed outlook, and we think longer-term rates can gradually moderate as inflation resumes its downtrend and the Fed moves closer to a rate cut later in the second half of the year.
• Housing data adds some color to economic picture – A batch of housing data showed some downshift in activity in March. Housing starts and building permits, which indicate both new and upcoming construction, declined modestly from the previous month. We surmise weather may have played some role, as starts declined more meaningfully. Also, the tick back higher in interest rates may be playing a role in new housing demand. That said, there have been signs of renewed housing investment recently, a sign that demand is holding up despite higher borrowing costs. Monday's retail-sales report showed notable strength in consumer spending, which we think is a function of a healthy labor market and overall consumer optimism, which should continue to support economic growth this year, in our view. We think a central reason that equity markets have held up so well in the face of the recent rise in interest rates and delayed timeline for Fed rate cuts is the ongoing strength of the economy. To the extent GDP growth remains a source of support for corporate earnings growth, we think markets can tolerate a delay in anticipated policy easing from the Fed, assuming there is no structural turn higher in core inflation.

Craig Fehr, CFA
Investment Strategy

^*FactSet

• Rising yields and Middle East tensions pressure markets – Friday's pullback deepened today, as rising bond yields and geopolitical concerns overshadowed additional evidence that the U.S. consumer remains strong. Equities opened higher on hopes that the Israel-Iran conflict may be contained. Also U.S. retail sales exceeded estimates, adding to the string of positive economic data. However, the early strength faded as the 10-year Treasury yield exceeded 4.60%, the highest since November, pressuring mega-cap tech and growth-style investments*. Rate-cut expectations were pared back further, and markets now expect between one and two cuts by year-end, with the first one arriving likely in September from the previously expected June cut*. Oil prices reversed their morning losses and finished modestly lower, but near their highest in six months*. On the corporate front, shares of Goldman Sachs finished up around 3%, as the company's earnings exceeded estimates. On the flipside, shares of Tesla lost more than 5%, as slowing electric-vehicle demand is leading the company to reduce its global headcount by more than 10%*.
• Geopolitics takes center stage, but impact likely temporary - Iran's retaliatory strikes raised the temperature over the weekend, risking a wider conflict in the Middle East. However, Israel, with support from allies, was able to block most of the attack. While the situation is fluid and Israel's response is unknown, hopes are that the conflict may be contained. From a market perspective, the primary concern is the potential for a sustained rally in energy prices that would put upward pressure on inflation, further delaying central-bank easing. So far, the energy supply-and-demand dynamics remain unchanged. On the demand side, even though the outlook for global growth is slowly improving, growth outside of the U.S. remains subdued. On the supply side, OPEC+ is keeping production restrained, as it decided last month to extend its output cuts into the second quarter. But if oil prices spike, the OPEC countries have spare capacity to increase production and prevent a sustained rally. Saudi Arabia, the United Arab Emirates, and Iraq are keeping about five million barrels a day out of the market, which equates to about 5% of the world’s demand, and more than what Iran itself produces**. History suggests that geopolitical risks and the associated shock in confidence tend to be short-lived, as markets gravitate toward the more sustainable drivers for returns.
• Retail sales confirm U.S. economic strength - U.S. retail sales rose more than expected in March (0.7% vs. 0.4%), and the prior month was revised higher, indicating that consumer spending remained resilient and ended the first quarter with positive momentum. The control-group sales, which exclude autos, gasoline, building materials and food services, and feeds into the GDP calculation, jumped 1.1%, the most in a year*. Taken together with last month's strong payroll gains and the hotter inflation reading, the acceleration in retail sales suggests that the Fed won't be in a rush to cut interest rates and investors must adjust to a high-for-longer rate regime. In our view, an improved growth outlook is better than the alternative, despite the potential for the Fed to ease policy more slowly. Even with fewer rate cuts, ongoing economic growth and a budding recovery in manufacturing can support corporate profits and extend the expansion and bull market, though with more volatility along the way.

Angelo Kourkafas, CFA
Investment Strategist

^{*FactSet
**Bloomberg}

• Stocks end broadly lower, dollar strengthens - Caution persisted today in U.S. equity markets, which posted their biggest decline since October driven by a mix of elevated geopolitical risk, inflation worries, and earnings disappointments. The March inflation data released earlier in the week put some doubt that the expected Fed rate cuts will be delivered, and yields rose sharply, pressuring bonds. However, yields declined today on concerns of an Iranian retaliatory strike. Investors also parsed U.S. big bank earnings, which kicked off the earnings season. Shares of JPMorgan declined more than 5% as banks missed estimates for net interest income. Shares of Citigroup reversed their earlier gains after its first-quarter profit exceeded estimates. Elsewhere, European stocks outperformed, as expectations grew that the European Central Bank (ECB) will start cutting rates in June. The likely diverging policy with the ECB cutting rates before the Fed is helping the dollar rally to a five-month high against other major currencies*. Oil prices finished slightly higher amid tensions in the Middle East.
• Inflation worries trigger a rate-cut rethink - The hotter-than-expected U.S. CPI for the third straight month triggered concerns around interest rates remaining higher for longer. With the economy remaining strong and progress on disinflation stalling, investors are pushing back and trimming the expected Fed rate cuts. Bond markets are now pricing between one and two rate cuts by the end of the year, compared with six just three months ago*. That adjustment pushed the 10-year Treasury yield to its highest since November before pulling back some the last two days*. The bumpier-than-expected inflation path likely introduces more volatility for both bonds and equities and could be the catalyst for markets to take a breather after five months of strong gains. We expect the "last mile" of inflation to take longer and require some patience, but we see further progress ahead. Supporting factors may include a moderation in shelter and used car prices, as well as a broader cooling in services inflation driven by slower wage growth.
• Banks kick off first-quarter earnings - In addition to the outlook for central-bank policy, the trends in corporate profits will take center stage in the weeks ahead. Big U.S. banks are among the first to report earnings for the first quarter, with JPMorgan, Wells Fargo and Citigroup results out this morning. The market reaction was negative, but the financial services sector traded mostly in line with the market. The improvement in the macroeconomic outlook and a resilient consumer support bank earnings, but profit pressures and issues with commercial real estate persist. More broadly, expectations are for S&P 500 earnings to grow about 3% for the quarter, validating the reacceleration in profits this year after a flat 2023*. In our view, at- or above-trend economic growth, together with rising earnings, can sustain the bull market, even with fewer Fed rate cuts. We wouldn’t be surprised if the start of the second quarter coincides with a run-of-the-mill correction or pullback, but we would view any potential weakness as an opportunity, given the still-positive economic and corporate fundamentals.

Angelo Kourkafas, CFA
Investment Strategist

^*FactSet