Monday, 4/22/2024 p.m.
- Stocks gain ground to kick off the week – After a tough week in which the S&P 500 shed 3%, equities found some footing on Monday, both in the U.S. as well as overseas, where European and Asian markets were higher. Bond yields were little changed, with the 10-year rate holding just above 4.6%, slightly below the recent high but notably higher over the past few weeks. Gold and oil prices were lower to start the week, with the former likely backing off as risk appetite picked up today, while the latter responded to the lack of escalation in the Middle East conflict. The technology and financial services sectors were the largest gainers on Monday, reflecting a return of optimism, as last week's beaten-up areas regained some ground.*
- Earnings in focus – Earnings season is in full swing, with the spotlight poised to intensify in the days ahead, as Tesla, Alphabet (Google), Microsoft and Meta (Facebook) will announce quarterly results between Tuesday and Thursday. Expectations remain high for this mega-cap tech cohort, but with the Nasdaq off more than 5% last week, some dose of caution may be setting in ahead of these earnings releases. Despite an 8% pullback in the S&P 500 technology sector over the last month, it shouldn't be lost that this group is still up more than 3% on the year and 19% over the last six months. Meanwhile, the other standout group, the communication services sector, has gained 14% year-to-date and 23% since last October.* While earnings from the so-called Magnificent 7 group will be in focus, the broader earnings picture will, in our view, be a key driver (and we think, pillar of support) for market performance over the balance of 2024.
- The week ahead – It was a particularly quiet day on the economic-data calendar, but things will pick up significantly as we move through the week. We're somewhat in the void between employment and CPI inflation reports, and Fed officials are now in the blackout period for public commentary until the next rate announcement on May 1, but markets will process incoming data through the lens of implications for economic growth and Fed policy ahead. We'll get the latest PMI manufacturing and services surveys on Tuesday, followed by the first look at first-quarter GDP on Thursday. But the clear headliner for the week will come on Friday with the release of the March personal consumption expenditures (PCE) inflation data. While the consumer price index (CPI) report gets most of the attention, the core PCE measure is the Fed's preferred gauge of inflation. Thus, Friday's report will, in our view, be influential to the market's direction as we sit in the intersection between the sharp rally of the last several months and the pullback of the last several days. The PCE report is expected to show a slightly more favorable trend in inflation, which would be a welcome (if not necessary) sign given the last few CPI reports have painted a more uncomfortable picture in which the improvement in inflation has seemingly stalled.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Markets weaker as geopolitical tensions remain in focus – Stocks finished broadly lower on Friday, led by declines in the technology sector, with the S&P losing 0.9% and the Nasdaq falling 2%. The Dow did manage to close in positive territory, thanks to a strong gain in shares of index member American Express. News of an Israeli retaliatory strike on Iran kept geopolitical uncertainties elevated heading into the weekend, with investor sentiment remaining in a "risk off" position that has emerged in recent weeks from the combination of the conflict in the Middle East and an increasing realization that uncooperative inflation trends will likely push back the Fed's timetable for rate cuts. Oil prices were little changed on the day and were down notably for the week, which we think indicates that the oil markets are already pricing in a fair degree of uncertainty as well as the prospects that idle supply could be brought online if Iranian production is impacted. Treasury bond yields were lower and gold prices rose, reflecting the defensive posture across financial markets.*
- Earnings season underway – First-quarter earnings announcements for the S&P 500 have begun, with Friday's earnings spotlight shining on results from Netflix, Procter & Gamble and American Express, each of which offered a fresh read-through for broader market trends. Netflix beat consensus expectations on the top and bottom lines, but forward guidance appears to have underwhelmed, which we think is an indication of the high bar of expectations in the technology and communication services sectors. These expectations have been reflected in the significant outperformance for those areas over the last year. P&G's and Amex's results provide a fresh look at the state of the consumer, with the former raising its earnings growth projections on a solid demand outlook while also indicating that higher prices are showing up in consumer buying habits. We expect overall earnings growth to set the pace for market performance over the course of 2024. Consensus expectations are calling for roughly 10% profit growth for the S&P 500 this year*, which we think is reasonable but will also require ongoing economic resilience.
- Perspective on market pullback – After a steady rally from October to the beginning of April, the stock market has shown its first signs of fatigue recently. The S&P 500 finished lower for the week, marking the third straight weekly loss, the first such streak in over five months. Volatility rarely feels comfortable, but perspective is useful here. The stock market is down just 5% from the all-time high. For context, equities have historically experienced two 5% dips per year, on average, so this bout of weakness is, in our view, normal. Moreover, after the more-than-25% rally over the last several months*, we think a breather is to be expected, if not healthy. The technology sector, which has been a runaway leader for the market over the last year, is among the laggards during this pullback, which we believe reflects some normal rebalancing within the market, instead of signaling something more structural or worrisome about the outlook. We wouldn't rule out some additional ongoing volatility as markets continue to assess the inflation and Fed policy outlook, as well as the tenuous situation in the Middle East. But we think the underpinnings of this bull market remain in decent shape, making temporary pullbacks, in our view, a compelling buying opportunity.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Stocks finish mostly lower: Equity markets finished mostly lower, with the S&P 500 posting a daily decline for the fifth consecutive day. The Dow gained a modest 25 points, while the S&P 500 shed roughly 0.2%.* At a sector level, communication services, utilities and consumer staples were the top performers of the S&P 500, while technology lagged. The technology sector underperformance followed cautious guidance from Taiwan Semiconductor, which raised uncertainty about broader semiconductor demand in the months ahead.* Overseas, both Asian and European markets finished mostly higher. The move higher in Asian markets came despite President Joe Biden's proposal yesterday of raising tariffs on certain Chinese steel and aluminum products to 25% from the current 7.5%.* While the headline is attention grabbing, we would expect limited direct market impact if the tariffs are implemented. According to the U.S. Census Bureau, China accounted for only 2% of the dollar value of U.S. steel imports in the first two months of 2024. In bond markets, Treasury yields finished higher, with the 10-year yield closing around 4.63% and the 2-year yield around 5%.*
- Jobless claims remain low, highlighting tight labor-market conditions: Initial jobless claims were 212,000 for the prior week and below expectations of 215,000.* Today's reading of 212,000 is only marginally higher than the 20-year low set in September 2022 of 187,000, and well below the 20-year median of 318,000, highlighting the continued strength in labor-market conditions.* A tight labor market has been a driving force behind resilient consumer spending over the past year. Looking ahead, we expect current labor-market conditions will ease; however, we don't expect a sharp rise in unemployment. While perhaps less of a tailwind to consumer spending than in the past year, we expect the labor market to remain supportive.
- Markets eye busy week of economic data ahead: With no major economic releases the remainder of this week, markets will look ahead to a full economic calendar for the week ahead. First-quarter GDP will highlight the week and will be released on April 25. Economists are calling for GDP to grow by 2% on a quarter-over-quarter annualized basis, which, while a step down from last quarter's 3.4% rate, would still represent healthy economic growth.* We've seen a string of strong recent economic data that should support a healthy GDP reading for the first quarter. Monday's retail-sales report exceeded expectations for a 0.4% gain, growing by 0.7% month-over-month in March.* Additionally, the March ISM Manufacturing report showed that manufacturing activity returned to expansionary territory for the first time since late 2022.* While we expect GDP growth to slow from the above-trend rates achieved in the second half of 2023, continued strength in household consumption, along with a rebound in sectors of the economy that have lagged over the past year such as manufacturing, should help extend the expansion.
Brock Weimer, CFA
Associate Analyst
*FactSet
- 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
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