Daily market snapshot

• 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

• Markets close mostly higher after producer price index (PPI) inflation comes in slightly cooler than expected: After a sell-off of nearly 1% in the S&P 500 on Wednesday, driven by hotter-than-expected consumer price index (CPI) inflation, markets moved higher on Thursday, as PPI inflation for March came in slightly lower than expected. Headline PPI was 2.1% year-over-year, below forecasts of 2.2%, although still higher than last month's 1.6% reading*. The tech-heavy Nasdaq outperformed both the S&P 500 and Dow Jones. In our view, the "higher for longer" interest-rate environment has weighed on rate-sensitive parts of the market, like real estate and utilities, as well as small-cap stocks. The parts of the market with outsized balance sheets and large cash reserves, including mega-cap technology, have fared better, as rates have climbed recently. Treasury yields ticked higher again too after moving sharply higher on Wednesday, logging the biggest one-day move in yields this year. On Thursday, the 10-year Treasury yield rose by 0.02% to 4.55%, at the highs of the year*. This comes as the expectation for Fed rate cuts has been pushed out more definitively. Markets now expect just two Fed rate cuts this year, starting at the September meeting. In our view, the Fed will need more evidence that the recent persistent inflation trends are easing before contemplating cuts. And with five CPI inflation reports between now and the September 18 Fed meeting, there should be ample data to determine if the trend in inflation is moderating from here.
• PPI inflation comes in cooler than expected, offsetting the hot CPI inflation a bit – Investors were given a bit of relief on Thursday when PPI inflation for March came in generally cooler than expected, unlike the shock that rattled markets after Wednesday's CPI report was hotter than forecast. Headline PPI inflation came in at 2.1% year-over-year, below forecasts of 2.2%, although still higher than last month's 1.6% reading*. Core PPI, excluding food and energy, was 2.4% year-over-year in March, a tick higher than expectations of 2.3% and higher than last month's 2.1% reading. Underneath the surface, goods inflation continued to show signs of cooling, up 0.8% annually, while services demand remained elevated, up 2.8% annually*. In our view, while inflation generally remains above the Fed's 2.0% target, we see an economy and labor market that continues to remain above trend, which provides support to consumer confidence and spending broadly. This also allows the Federal Reserve to take its time as it considers embarking on rate cuts, given that there is no sign of an economic downturn that would require immediate easing of monetary policy. Over time, we expect inflation to moderate, as shelter and rent continues to ease, and services inflation may cool as wage gains soften. This backdrop lends itself to less restrictive interest-rate policy, likely beginning in the second half of 2024.
• All eyes turn to first-quarter earnings season – Earnings season will kick off on Friday, with large banks like J.P. Morgan, Citi, and Wells Fargo reporting earnings and delivering conference calls. Investors will be listening intently to what the impact of "higher for longer" interest rates has been on the consumer, housing market, loan demand, and capital-markets activity. Overall, the expectation is for S&P 500 earnings growth to come in at around 2.8% year-over-year in the first quarter, below the 5.6% that was expected at the start of the year*. With the bar being lowered for first-quarter earnings, and with economic growth and consumption remaining robust, this earnings season could yield upside surprises across sectors, in our view. More broadly, forecasts continue to call for 2024 full-year earnings growth of around 10.7% annually across most of the 11 S&P 500 sectors*. In our view, better earnings growth will be a key driver of market performance in 2024, especially as valuations have already expanded in several sectors, most notably in mega-cap technology.

Mona Mahajan
Investment Strategist

^*FactSet

• Markets fall after disappointing CPI report – Stocks closed sharply lower on Wednesday in response to hotter-than-expected inflation data, with the S&P 500 narrowly avoiding what would have been just its seventh 1%-down day in the last five months. Equities have rallied sharply since last fall, as market enthusiasm rose around the prospects of upcoming rate cuts from the Fed. That enthusiasm waned on Wednesday as this firm CPI reading likely takes a Fed rate cut at the June meeting off the table, pushing back both the start date and the number of rate cuts in 2024.  Bond yields shot notably higher in response, with the 10-year Treasury yield topping 4.5% for the first time since last November, as the bond market adjusts to new expectations for monetary policy. We're not surprised to see this knee-jerk reaction lower in the stock market, given both the size of the recent rally as well as the market's ongoing sensitivity to Fed rate expectations. At the same time, while this may serve as the catalyst for some short-term weakness, we don't see this as the beginning of a more severe downturn. Moreover, it should not be lost that the S&P 500 is still up more than 8% 2024 and has gained more than 25% since October.*
• Inflation comes in hotter than expected – The latest consumer price index (CPI) report showed that inflation is proving to be a bit stubborn, with headline CPI rising 3.5% year-over-year in March, above consensus expectations for 3.4%. Stripping out food and energy prices (with the latter serving as an upward force lately), core CPI was also hotter, rising 3.8% in March, holding steady with February's pace. Looking under the hood, there were some encouraging trends, including an overall drop in core goods prices led by a fairly sizable drop in used vehicles (which was a forceful driver of the spike in inflation 12-18 months ago). Another decent sign was the trend in shelter prices, which rose at a more moderate pace than recent months. Shelter prices have been one of the more persistent components of inflation up to this point, and further cooling in this category will be critical to inflation returning to a more sustainable (comfortable) rate. The fly in the ointment looks to have been in services prices, namely medical care and insurance premiums, which increased materially in the month. Overall, while this report shows that inflation is not cooling as quickly as hoped, this is not, in our view, a signal of a renewed spike in consumer prices. Instead, this is consistent with our long-held view that inflation would experience some hiccups along the broader path.  The upshot is that, in our view, this report all but eliminates the possibility of the Fed cutting rates at its June meeting. We don't think this takes rate cuts off the table in 2024, but we think the Fed will need to see several months of moderating inflation from here before it will have the confidence to start cutting rates.
• More data on deck – Wednesday's CPI report is the clear headliner, not only for this week, but more broadly in terms of shaping market sentiment. That said, this week will bring additional data to the mix, with the March producer price index (PPI) report up next. While not as pivotal as the consumer price reading, PPI will give a fresh look at the price trends flowing through the supply chain, which can provide some directional signals on the input costs that will influence CPI ahead. Higher energy costs will likely push the March headline reading higher, but any moderation in core PPI (excluding food and energy) would be a welcome sign given the recent firming in consumer price inflation. The end of the week will bring the start of earnings season. While expectations for upcoming Fed decisions continue to have a firm grip on the market wheel, we think corporate-earnings trends will play an increasingly influential role in market performance as we progress through 2024. While economic resilience is presenting some challenges to falling inflation, the other side of that coin is that healthy economic growth sets a sturdy foundation for corporate-earnings growth. With equities rallying sharply over the last five months in anticipation of Fed rate cuts, market valuations have expanded. It's now up to earnings growth to make good on that optimism. First-quarter earnings results will get rolling on Friday with several of the big banks reporting. Consensus estimates are looking for low-single-digit S&P 500 profit growth for the quarter and slightly better than 10% growth for 2024, with the latter, in our view, offering support to market performance this year if achieved.

Craig Fehr, CFA
Investment Strategy

^*FactSet