Daily market snapshot

• Stocks edge higher: Equity markets closed mostly higher on Tuesday, with the S&P 500 posting a daily gain for the fourth consecutive day. Leadership was balanced, with most sectors of the S&P 500 finishing higher, led by real estate and utilities, which both gained over 1%.* Overseas, Asian markets were mixed overnight, while European markets closed mostly higher in response to better-than-expected retail sales data from the eurozone.* Treasury yields finished lower once again, with the 10-year yield down to around 4.45%.* The 10-year yield has pulled back meaningfully from its recent peak of 4.7% in response to last Friday's softer-than-expected jobs report and commentary from Fed officials that signaled that additional rate hikes are unlikely. On the corporate front, shares of Disney were under pressure, declining roughly 9%, after the company reported earnings that exceeded expectations but issued guidance below consensus estimates.*
• Sector leadership showing signs of broadening: 2023 was a year characterized by narrow leadership, with strong performance from a handful of mega-cap technology stocks the primary catalyst behind the S&P 500's 26% gain.* The technology, communication services and consumer discretionary sectors each returned over 40% in 2023, whereas no other sector returned over 18%.* The past three months, however, have seen a broadening of leadership, with cyclical and defensive sectors performing well alongside some of last year's leaders. After declining by 7% in 2023 and posting the lowest return among all S&P 500 sectors, utilities has been the top-performing sector since early February, gaining nearly 15%.** Cyclical sectors, such as energy, materials and industrials, have also performed well, with each sector higher by 7% or more. We believe market leadership could continue to broaden, with some of last year's laggards potentially playing catch-up. As part of our opportunistic equity-sector guidance, we recommend clients overweight utilities, consumer discretionary and industrials, while underweighting communication services, financials and materials as appropriate with their long-term goals.
• Global monetary policy in focus: With it being a quiet week on the domestic economic calendar, international economic data could guide the path in markets this week. Thursday's Bank of England (BoE) meeting will be in focus, with expectations for it to hold the official bank rate steady at 5.25%.* After peaking at over 11% in October 2022, U.K. inflation has fallen sharply over the past 18 months, with the March reading of consumer price index (CPI) inflation falling to 3.2% on a year-over-year basis.* Despite the progress, inflation remains above the BoE's 2% target, and improving economic activity (albeit from low rates) and wage growth that's running north of 5% year-over-year could slow the pace of disinflation over the coming months. This could delay but likely won't cancel rate cuts from the BoE, which we expect could occur later this year. We believe that opportunities and risks are balanced in developed international equities, and we recommend a neutral allocation as part of our opportunistic asset-allocation guidance.

Brock Weimer, CFA
Associate Analyst

^{*FactSet, **FactSet, S&P 500 Sectors Total Returns 2/6/2024 – 5/6/2024.}

• Stocks close higher: Stock markets moved higher Monday, extending gains from last week, with small-cap stocks outperforming*. With the recent rise, the S&P 500 is less than 2% below its all-time high reached in March. Sector performance was broad today, led by technology and communication services, with all sectors rising except real estate*. Global markets also rose across both Asia and Europe, though with some markets closed for holidays. The U.S. dollar was mixed versus major currencies. In the commodity space, WTI oil was up, near $79 per barrel, tracking gains in Brent crude on Saudi Arabia price hikes*. Gold also rose but remained about 3% below the all-time high set in April*.
• Corporate earnings remain in focus for the week ahead: With a light week on the economic calendar and 56 companies in the S&P 500 scheduled to report results, markets will likely focus on earnings*. At this point in the first-quarter earnings season, companies have performed well relative to expectations, providing support for the recent rise in stock prices. With 80% of the S&P 500 companies having reported earnings so far, 77% have beaten analyst expectations, with an average upside surprise of 7.5%*. Year-over-year earnings growth for the first quarter is 5.0%, which is the highest rate since the second quarter of 2022*. Sector performance is broad, with eight of the 11 sectors reporting year-over-year earnings growth*. We believe the continued broadening of earnings performance should allow lagging sectors to catch up and help extend the economic expansion.
• Bond yields lower: Treasury yields were modestly lower, with the 10-year yield just below 4.5%, following a decline of about 0.2% from recent highs. Short-term yields have also dropped but remain higher than intermediate-term yields, keeping the yield curve inverted. Slower payroll gains and wage growth released last week indicate a loosening labor market, driving expectations for lower inflation ahead. Our view is that the Fed should be able to cut rates in the back half of the year, which would support economic growth. Lower rates could increase reinvestment risk for cash and short-term CDs and bonds. Extending duration into intermediate- and long-term bonds and bond funds can help reduce reinvestment risk by locking in yields for longer.

Brian Therien, CFA
Senior Analyst

^*FactSet.

• Stocks and bonds rally after a softer jobs report - U.S. equity markets rose more than 1% on Friday with the Nasdaq outperforming as the 10-year Treasury yield fell sharply in response to a weaker than expected jobs report. Payroll gains and wage growth both slowed, helping solidify Chair Powell's message earlier in the week that the Fed is not looking to hike rates despite the lack of progress in inflation so far this year. Further boosting investor sentiment, shares of Apple rallied more than 7% after the company's earnings exceeded low expectations for the quarter*. The company also announced a record $110 billion stock buyback. The dollar fell against major currencies as markets started pricing back in two Fed rates cuts for the year*. Elsewhere, WTI oil finished the week below $80/barrel and posted its sharpest weekly pullback since February*.
• Wage gains cool as pace of hiring slows - The U.S. economy added 175,000 jobs last month, below consensus estimates and the smallest gain in six months, while the unemployment rate ticked up to 3.9% from 3.8%. Almost half of the payrolls gains came from health and private education as construction and public sector hiring slowed*. Given the stubborn inflation in the services sector of the economy where labor costs carry an outsized impact, the focus was on average hourly earnings, which rose only 0.2% from the previous month vs. the 0.4% average in the first three months of the year. On an annual basis wage growth rose 3.9%, down from 4% for the first time since June 2021, an encouraging development for the Fed as it looks to bring inflation back to its 2% target*. The key takeaway in our view is that the labor market remains solid, but employment growth is slowing which should help ease some of the inflationary pressures and allow the Fed to implement its first rate cut in the back half of the year.
• Rate cuts delayed, not derailed; rising profits provide support - After the FOMC meeting this week markets breathed a sigh of relief that the Fed is not contemplating rate hikes at the moment, with Chair Powell characterizing policy "well-positioned" to deal with various paths. Today's jobs report reinforces this message. Nonetheless, as the progress on inflation has stalled, policymakers are looking to keep rates high for longer. We think the Fed has a bias to cut rates this year, but it will likely take several months and better inflation readings until policymakers gain more confidence in the inflation outlook. While the rise in bond yields this year triggered by a recalibration in Fed expectations is applying pressure on equity valuations, corporate earnings have continued to surprise to the upside, providing support. About 80% of the S&P 500 companies have reported results so far, and of those, an above-average 79% have beaten analyst expectations with an average upside surprise of almost 9%*. Mega cap tech has been a standout for its strong earnings delivery but growth for the rest of the market is improving as well. For the full year corporate profits for the S&P 500 are on track to grow a little over 10%, which would mark a meaningful acceleration from last year, helping keep the uptrend in stocks intact*. 

Angelo Kourkafas, CFA
Investment Strategist

^*FactSet.

• Equities see a post-Fed lift: Stocks finished higher on Thursday, finding some footing after a volatile day on Wednesday, as markets attempted to digest the message from the Fed's latest policy meeting. With equities rising and interest rates falling, the tone today appears to be one of cautious optimism that the Fed won't overreact to recent firm inflation data by tightening monetary policy further. With the latest jobs report due out tomorrow, today's action likely suggests that there is some comfort being found in expectations for ongoing healthy employment conditions. Technology, consumer discretionary and real estate, along with small-caps, led the way today, reflecting a return of risk appetite and a more upbeat mood around the cyclical outlook. Gold and oil prices were little changed, while global equities were mixed on the session.*
• Jobs, jobs, jobs: Although the Fed meeting yesterday was the headliner for the week, the spotlight will swing brightly toward the labor market, with the April employment report due out Friday morning. Rates have risen materially over the last month, as investors have come to grips with the fact that the Fed won't be able to cut rates any time soon given uncooperative inflation readings so far this year. The stock market has experienced a bit of indigestion as a result but has overall taken this adjustment relatively well, sitting just 4% below its all-time high. We attribute this to the ongoing strength in the economy that has made higher rates a bit more palatable. Thus, the attention will be squarely on the fresh labor-market data for signals around the prospects of ongoing resilience in consumer spending and overall GDP. Consensus expectations are calling for roughly 230,000 new jobs and a steady unemployment rate for the month. We think, however, that a particularly influential figure will be the trend in wage growth, as markets likely want to see that job growth is holding up at the same time that wages are normalizing, hitting the sweet spot of support for spending and relief on inflation pressures.
• Productivity remains a bright spot for the economy: The latest read on labor-force productivity showed productivity rose at an annual pace of 2.9% in the first quarter, up from 2.7% in the prior reading. Productivity growth has been a particularly bright spot for overall GDP in the last several quarters, a trend that we think has been supported by increased business investment in technology and efficiency, and also one that has the potential to be sustained longer-term by AI investments. Strong productivity growth provides a potential backdrop in which unemployment can remain low while inflation pressures simultaneously subside. One item of note in looking at the underlying data was the increase in labor costs, which jumped in the first quarter.  The annual rate of growth of labor costs has actually slowed to a more comfortable pace, but the surge to start 2024 is consistent with the recent bout of inflation worries, which will keep the market's focus on the balance between consumer prices and economic health, and on the ensuing implications for Fed policy ahead.

Craig Fehr, CFA
Investment Strategy

^*FactSet.