Friday, 4/12/2024 p.m.

  • 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


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