Wednesday, 4/24/2024 p.m.
- Stocks struggle for direction as yields rise - After a strong rebound over the previous two days led by tech, equity markets finished mixed today. The Nasdaq was helped by an 11% jump in the shares of Tesla after the company reported first-quarter results that were not as bad as feared*. The company also announced a renewed push to accelerate the launch of less expensive cars to improve growth. However, the TSX, U.S. small-caps and the Dow declined, as higher bond yields offset optimism on corporate profits. The defensive sectors outperformed, while the industrial sector lagged, as shares of Boeing declined after Moody's slashed the company's credit rating. Elsewhere, WTI oil pulled back below $83, but remains up more than 15% year-to-date*. In Canada, retail sales declined 0.1% in February, falling short of the preliminary estimate for a 0.1% gain. The estimate for March suggests that sales were unchanged in March, further reinforcing expectations that the BoC is likely to cut rates in June.
- Earnings take center stage - This week is the busiest of the earnings season, with about one-third of the S&P 500 companies reporting earnings, representing 40% of the index's market capitalization*. So far results have been encouraging, with 80% of the companies surprising to the upside, exceeding earnings expectations by 8.5%*. For the full year, earnings estimates are holding steady, indicating that earnings are on track to growth 10.3%, supporting the bull market in stocks*. The spotlight this week is on the “Magnificent Seven” group of mega-cap tech names**. Tesla's results and strategic update are lifting the group today, with the focus then shifting to Meta's results that are coming out after the market close, followed by Microsoft and Alphabet on Thursday. Profits for the Magnificent Seven are forecast to rise 38% in the first quarter from a year ago, handsomely exceeding the S&P 500’s 3% expected earnings growth*. However, that outperformance and gap with the rest of the market will likely start to narrow in the back half of the year, which supports our view that the rally will broaden to other companies and sectors that lagged last year.
- U.S. GDP and inflation data to provide clues for rate outlook - Investors will be parsing through the U.S. GDP growth estimate on Thursday and inflation data on Friday, with the fresh readings viewed through the lens of what it means for Fed policy. Unlike Canada, resilient growth and the slow progress in inflation in the U.S. have pushed back the timeline of when interest rates may be cut by the Fed, with markets now anticipating less than two rate cuts for the year*. The first estimate of first-quarter GDP is expected to show that the U.S. economy grew at a 2.5% annualized pace, a modest slowdown from the 3.4% pace seen in the fourth quarter*. On the inflation front, the core personal consumption expenditures price index (PCE), which is the Fed's preferred measure of inflation, is expected to tick lower to 2.7% in March from a year ago*. That pace of inflation is still elevated, but the trend remains lower, and, in our view, conditions will fall into place for the Fed to gain confidence to cut rates, maybe not in the summer, which is when we expect the BoC to ease policy, but possibly in September.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet.
**Magnificent 7 represented by Apple, Amazon, Alphabet, Microsoft, Tesla, NVIDIA and Meta Platforms.
- Stocks rise in response to soft U.S. economic data: Equity markets finished higher Tuesday, with corporate earnings and economic growth center stage for markets. The TSX gained roughly 0.7% while the S&P 500 finished the day up over 1%.* Sector leadership was broad based with most sectors of the S&P 500 finishing higher led by communication services and technology.* Risk-on sentiment was evident in markets today with U.S. small-cap stocks outperforming and rising by over 1.7%.* Markets responded favourably to a softer-than-expected S&P Global Purchasing Managers' Index (PMI) reading, which signaled U.S. economic activity continued to expand in April but at a slower pace than the prior month.* While softer economic growth seems hardly like something to root for, markets are likely viewing this reading through the lens that softer economic growth could lead to lower inflation and rate cuts from the Fed. The 10-year GoC yield was little changed at around 3.76% today while U.S. 10-year yield ticked down to around 4.60%.* In the commodity space, oil prices finished the day higher, rising to just above $83 per barrel.
- Earnings in the driver's seat: Corporate earnings will be front and center for markets this week, with four members of the Magnificent 7*** scheduled to report. Tesla will kick things off for the group after market close today, followed by Meta, Alphabet and Microsoft later this week. Thus far, roughly 20% of the companies in the S&P 500 have reported first-quarter earnings, with estimates calling for roughly flat year-over-year growth for the first quarter.* Expectations are highest for the information technology, communication services, consumer discretionary and utilities sectors, which are all expected to see double-digit earnings growth in the first quarter.* Looking ahead to the full year, expectations are calling for just over 10% year-over-year earnings growth for the S&P 500 compared with roughly flat growth in 2023.* Earnings in the TSX will ramp up over the coming weeks, with only 3% of companies having reported first-quarter earnings thus far. In our view, healthy corporate profit growth will be a necessary condition for sustained equity-market strength the remainder of the year.
- Global growth showing signs of strengthening: The preliminary reading for the April S&P Global PMI signaled that economic growth is firming across the globe. The eurozone composite PMI reading of 51.4 (a reading above 50 signals expansion) was the highest reading in 11 months, driven by strength in the services sector of the economy.* The U.K. reading was strong as well, with the composite PMI ticking up to 54, also an 11-month high, while the Japan composite PMI reading of 52.6 was the highest since August 2023.** Looking ahead, our view is that U.S. economic growth will likely continue to lead in 2024. However, we believe the worst is likely behind overseas economies from a growth standpoint. Additionally, developed overseas stocks trade at a large discount relative to U.S. stocks and offer attractive dividend yields, which we believe justifies a neutral allocation to developed overseas stocks as part of a well-diversified portfolio.
Brock Weimer, CFA
Associate Analyst
*FactSet.
**S&P Capital IQ Pro
***Magnificent 7 represented by Apple, Amazon, Alphabet, Microsoft, Tesla, NVIDIA and Meta Platforms.
- Stocks gain ground to kick off the week – After a tough week in which the S&P 500 shed 3% and the TSX fell a more muted 0.4%, 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 near 3.75%, 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 central-bank policy ahead. We'll get the latest U.S. PMI manufacturing and services surveys on Tuesday, Canadian retail sales on Wednesday, and then the first look at first-quarter U.S. GDP on Thursday. But the clear headliner for the week will come on Friday with the release of the March U.S. 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 favourable trend in inflation south of the border, which would be a welcome (if not necessary) sign given the last few U.S. CPI reports have painted a more uncomfortable picture in which the improvement in inflation has seemingly stalled. Conversely, domestic inflation has been more muted recently, supporting the potential for the Bank of Canada to cut rates as early as this summer.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Markets mixed as geopolitical tensions remain in focus – Stocks finished broadly mixed on Friday. The TSX held up, thanks to gains in the energy and financial sectors, while the Dow closed higher, thanks to a strong gain in shares of index member American Express. The S&P and Nasdaq both finished notably lower on the day due to weakness in the technology sector. 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 U.S. 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. Government 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 TSX and S&P 500 were lower on 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. Stocks are down only modestly from all-time highs. 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 sharp and steady 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 central-bank 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 remain on the defensive, U.S. dollar strengthens - Caution persisted today in Canada and 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 U.S. inflation data released earlier in the week and ahead of the Canadian data next 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 and BoC cutting rates before the Fed is helping the dollar rally to a five-month high against other major currencies. The loonie fell to its lowest since November against the U.S. dollar*. 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.
- U.S. 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 U.S. 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
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