- Stocks rally in response to favorable inflation data: Equity markets finished higher in response to the April consumer price index (CPI) reading that showed inflation slowed from the prior month. Headline CPI rose 3.4% year-over-year compared with the prior reading of 3.5%.* The S&P 500 finished higher by 1.2%, while the technology-heavy NASDAQ rose 1.4%.* Sector leadership was balanced, with most sectors of the S&P 500 finishing higher, led by information technology and real estate.* Overseas, Asian markets were mixed overnight, as the People's Bank of China held its key policy rate steady, while European markets were mostly higher following a stronger-than-expected eurozone industrial production reading.* The favorable U.S. inflation report, along with softer-than-expected retail-sales data, drove bond yields lower, with the 10-year Treasury yield closing around 4.35%, its lowest since early April.*
- Inflation cooled in April: Inflation and its potential impact on monetary policy was center stage for markets today with the release of April CPI data. Headline CPI rose by 0.3% month-over-month versus expectations for a 0.4% gain.* Core CPI, which excludes food and energy, rose by 0.3% month-over-month, which was in line with expectations. On a year-over-year basis headline CPI rose by 3.4% while core CPI rose by 3.6%, the lowest reading since April 2021.* Additionally, the services component of CPI, which has run stubbornly high recently, rose by 0.4% month-over-month, the lowest reading since December.* Today's reading is a step in the right direction for the Fed to begin cutting rates. However, we believe it will take several more months of lower inflation before the Fed gains confidence that inflation is sustainably headed toward its 2% target and opts to cut rates. To that end, we expect inflation will continue to trend lower, and we believe the Fed could have a credible case to cut interest rates one or two times later this year.
- Consumer showing signs of fatigue: Retail-sales data out this morning suggest that consumers showed signs of fatigue in April. Headline retail sales were roughly flat month-over-month while control-group retail sales, which excludes spending on volatile components such as gasoline, building materials and auto dealers, contracted by 0.3% month-over-month versus expectations for a 0.4% gain.* In addition, March headline retail sales were revised lower from a 0.7% month-over-month gain to a 0.6% gain.* We'd view the April retail sales data as a sign that consumers are showing fatigue, but we don't believe they are fully exhausted. Labor-market conditions are easing but remain strong by historical standards, which should provide support to consumer spending. Our view is that consumer demand will moderate compared with 2023 but should remain in positive territory, supporting ongoing economic growth this year.
Brock Weimer, CFA
Associate Analyst
*FactSet
- Stocks close higher with inflation in focus: Stocks finished mostly higher, as markets digested the most recent batch of U.S. inflation data. The S&P 500 gained 0.5%, while the technology-heavy NASDAQ rose by over 0.7%.* Small-cap stocks outperformed today, with the Russell 2000 closing higher by over 1%.* Small-caps have gained more than 6% since mid-April, reflecting renewed risk appetite from investors, which has been driven by a pullback in bond yields. On the inflation front, producer price index (PPI) inflation was higher than expected for April; however, much of the upside surprise was driven by downward revisions to the March data. Accordingly, markets mostly overlooked the upside inflation surprise, with stocks rising and bond yields moving lower. At a sector level, leadership favored growth sectors of the S&P 500, with information technology and communication services among the top performers.* Overseas, European markets were mixed following an upbeat reading on German economic sentiment, which rose to its highest since 2022. Inflation will remain center stage for markets, with the release of consumer price index (CPI) inflation tomorrow.
- Inflation data higher than expected: Headline PPI for April was higher than expected, rising by 0.5% month-over-month versus consensus expectations for a 0.3% gain.* Core PPI, which excludes the volatile food and energy components, surprised to the upside as well, rising by 0.5% month-over-month versus expectations for a 0.2% gain.* However, the upside surprise in PPI was in large part due to downward revisions to the March data. Both headline and core PPI were revised from a 0.2% month-over-month increase to a -0.1% month-over-month decline for March. On a year-over-year basis, headline PPI rose by 2.2% in April, slightly below expectations, while core PPI gained 2.4%, slightly above expectations. With the upside surprise in the month-over-month change largely driven by prior revisions, we'd view today's inflation reading as better than the headlines suggest. Our view remains that inflation will trend lower in the months ahead, albeit not without bumps along the way. Inflation will remain in focus with the release of consumer price index (CPI) inflation tomorrow, where expectations are for headline CPI to rise by 3.4% year-over-year.*
- Strong corporate earnings have supported equity markets: Strong corporate profit growth has played a key role in the strength in equity markets over recent weeks. Over 90% of companies in the S&P 500 have reported first-quarter earnings, and roughly 80% have exceeded expectations, with earnings on pace to grow by over 5% year-over-year.* At a sector level, information technology, consumer discretionary and communication services continue to stand out, with each sector on pace to grow earnings by over 20% in the first quarter.* Defensive sectors, such as utilities and consumer staples, along with financials, have seen strong profit growth as well. Looking ahead to the full year, expectations are for the S&P 500 to grow earnings by nearly 11% year-over-year. We believe current valuations have limited scope to expand, and therefore strong profit growth will likely be a key ingredient for continued strength in equity markets the remainder of the year.
Brock Weimer, CFA
Associate Analyst
*FactSet
- Stocks steady to start the week – After gaining a little shy of 2% last week, U.S. equities finished little changed on Monday, with the S&P 500 essentially unchanged while the Nasdaq was higher and the Dow shed 81 points. Global markets were little changed while commodities were mixed, with oil edging higher and gold down. Bond markets were quiet as well, with the 10-year yield just below 4.5%. Technology was the standout leader today, while most other sectors traded in a fairly narrow range amid a lack of major data or headlines. We'd chalk up Monday's muted move to markets being in wait-and-see mode ahead of the pivotal inflation report due out later this week. With last week's rally, the S&P 500 is now back within shouting distance of all-time highs, as markets have rebounded from April's 5% dip, lifted by easing worries over rising interest rates. *
- Attention on inflation – The headliner for the week is undoubtedly the April consumer price index (CPI) report set to be released on Wednesday. Consensus expectations are looking for a 0.3% month-over-month increase in core CPI, following a string of hotter-than-anticipated 0.4% monthly increases to start the year. The moderation in the pace of inflation would be a welcome sign and one that we believe will be necessary to validate the rally in stocks and decline in yields so far in May. We'll be watching services and shelter prices in particular, as moderation in these categories has been stubbornly slow and will be required for a broader move lower in consumer prices as we move through the remainder of the year. We don't expect the downtrend to be steady, but persistent signs of disinflation over the next several months would, in our view, support the case for the Fed to squeeze an initial rate cut in before the year is over. Regardless of the exact timing, we continue to believe the Fed's next move will be a cut, which is a broadly favorable backdrop for the economy and financial markets.
- A fresh look at the consumer – In addition to the consumer price data, a round of additional upcoming reports will provide a fresh read on the state of the consumer. Persistent inflation in recent months, accompanied by a softer headline first-quarter GDP figure, spurred talk of potential stagflation, a condition in which the economy is weak at the same time that inflation is elevated. We think talk of stagflation is premature at this stage. Importantly, while the economy is likely to soften a bit from last year's strong pace, consumer spending (the lion's share of GDP) is poised to hold up reasonably well on the back of historically low unemployment and still-strong wage gains. The latest reads on April retail sales, along with quarterly earnings announcements from Home Depot, Target and Walmart, will offer investors a fresh look at household spending trends that will help round out the outlook for the economy. Announcements from other consumer companies in recent weeks has signaled some consumer fatigue. We think a slowdown in household spending is likely to unfold as we advance, but we think this will take the form of slightly slower growth, not a collapse in spending. This, along with signs of rebounding activity in other areas like manufacturing and capital investment, will, in our view, continue to power positive economic growth this year.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Stocks finish a positive week on an up note – Equities closed higher on Friday, closing out the third straight weekly gain. Global equities and commodities were more mixed, with oil finishing lower and gold higher on the day. The technology, financial services, consumer staples and health care sectors led the way, signaling an overall upbeat mood, with outperformance balanced across growth and defensive sectors. It was a very light day for data, capping off what was a fairly quiet week, as we're in the gap between key employment and inflation reports. That hasn't stopped markets from moving higher, as the absence of major headlines or economic releases has allowed equity markets to continue to take cues from positive corporate earnings results and the expectations for eventual easier Fed-policy settings. *
- Markets await the CPI report – Bond markets were in somewhat of a wait-and-see mode today, though the 10-year yield ticked modestly higher, near the 4.5% mark. Rates have pulled back notably so far in May, now back near early April rates, as markets have found comfort in the indications that the Fed is not considering a rate hike in response to stubborn inflation readings over the last several months. Next week's consumer price index (CPI) report will likely set the tone for both stocks and bonds ahead. April's pullback was driven by worries that persistent inflation has pushed back the Fed's ability to cut rates this year, but those worries have turned to enthusiasm in recent days, as the Fed's latest meeting indicated that policymakers are still expecting to be able to dial back restrictive policy as inflation resumes its trend of moderation. The upcoming CPI report will be key in confirming if the market's latest bout of optimism is appropriate. More broadly, we think the Fed's next move will be a cut, but it will come much later than originally anticipated. We could be in for a patch of choppy inflation data, but we think both inflation and longer-term rates can resume their gradual trend lower as we move through the back half of the year.
- Earnings remain a source of support – We're nearly through first-quarter earnings season, with almost 90% of companies having reported. Earnings growth remains, in our view, a bright spot for market performance, with more than three-quarters of companies beating consensus estimates to start the year. Earnings in the period are up 5% year-over-year, powered by double-digit increases from the communication services, technology, utilities and consumer discretionary sectors. Particularly encouraging is the pace of revenue growth (4%) in the quarter, indicating that demand continues to hold up, with the best gains spread across cyclical, growth and defensive sectors.* Profit margins have also been solid, signaling that companies are benefiting from resilient sales and the ability to manage in spite of ongoing elevated labor costs. We believe equity-market performance for 2024 will be supported by healthy profit growth, which will be aided, in our view, by a still-strong jobs market and the prospects of less restrictive interest-rate policy as we advance.
Craig Fehr, CFA
Investment Strategy
*FactSet