Daily market snapshot

• 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

• Stock markets close higher and are on pace for a winning week – The S&P 500 closed higher on Thursday and remains on pace for a third week of gains. This comes as U.S. weekly jobless claims rose to their highest of the year at 231,000*. The higher jobless claims figure is another datapoint indicating some softness in the U.S. labor market. For the Federal Reserve, this may add conviction to its view that rates are sufficiently restrictive, and wage gains could also cool. Treasury yields were lower across the curve, with the 2-year Treasury yield, often considered a proxy for the fed funds rate, moving lower by 0.02%, while the 10-year Treasury yield fell by around 0.03%*. More broadly, yields have come down from recent highs, as markets have once again priced in two Fed rate cuts this year. The move lower in yields over the past couple of weeks has provided support for both equity and bond markets.
• The U.S. labor market shows early signs of softening – On Thursday morning, U.S. weekly jobless claims came in at 231,000, above forecasts of 212,000 and last week's 208,000. This was the highest jobless claims figure of the year and the highest since August 2023*. While this is just one week of data and not yet a trend, the jobless claims data comes after last Friday's nonfarm-jobs report, which also surprised to the downside. Total jobs added in April were 175,000, well below last month's 315,000 and expectations of 240,000. The unemployment rate had also ticked higher from 3.8% to 3.9%*. Overall, while the U.S. labor market has been a source of strength for both the economy and consumer, in our view we may see a bit of cooling ahead. The supply of labor seems to be increasing as workers return to the workforce, while the demand for labor has been softening as job openings have decreased. While we would not expect a substantial rise in the unemployment rate beyond 4.0% - 4.5%, we do see better supply and demand balance and some downward pressure on wage growth, which may be supportive of lower services inflation.
• All eyes turn back to CPI inflation next week – Inflation will be front and center next week, with consumer price index (CPI) inflation for April released on Wednesday. After surprising to the upside for the first three months of the year, expectations are for both headline and core CPI inflation to moderate in April. Forecasts call for core inflation, which excludes food and energy, to cool to a 0.3% monthly gain after three straight months of 0.4% increases, which would be the first step in the right direction*. On an annual basis, core CPI is expected to tick down to 3.6% from 3.8%, and headline CPI is projected to decline to 3.4% from 3.5%*. 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. In our view, the Fed will likely need to see a series of three or so better inflation readings before signaling a first rate cut. We would expect these conditions to be in place by the last quarter of the year. 

Mona Mahajan
Investment Strategist

^*FactSet

• Stock-market rally pauses after winning streak - Equity markets were mixed today following four days of gains that pushed the S&P 500 within 1% off its record high. The Dow closed higher, adding to the streak, but the Nasdaq declined modestly, weighed by weakness in parts of tech. Shares of Shopify declined 18% on a surprise quarterly loss and disappointing guidance, while shares of Uber declined 5% after bookings missed estimates*. The economic calendar was light today, and sentiment was cautious, as investors are waiting for the next inflation report on 5/15 to gauge the outlook for interest rates. Bond yields and the dollar were higher, while WTI crude oil fell briefly to its lowest in almost two months before reversing higher to close near $80*. Overall, it was an uneventful trading session, with some hesitation ahead of a busy week of economic releases.
• Earnings season begins to wind down - With almost 90% of the S&P 500 companies now having reported earnings for the first quarter, results have come in better than expected, supporting the recent rebound in stocks. Companies have exceeded analyst estimates by 8.5%, which is the biggest upside surprise since the third quarter of 2021, driven by strong demand and an uptick in profitability, as input cost growth has moderated*. From a sector standpoint, communication services, consumer discretionary and technology continue to stand out for their strong growth, but other areas are also delivering solid results, namely industrials, financials and consumer staples. The only three sectors that are seeing earnings decline for the quarter are energy, materials and health care, with the latter reflecting a quarterly loss from Bristol Myers*. In our view, the continued economic expansion, combined with rising corporate profits, provides a positive backdrop for stocks despite the headwind of high interest rates for longer. We see an opportunity in areas of the equity market that have lagged and trade at lower valuations, such as U.S. mid-cap stocks and the equal-weight S&P 500, which better represents the performance of the "average" stock in the index.
• All eyes on CPI next week - The May rebound in stocks has so far erased most of the April losses, driven by strong earnings results as mentioned above, but also by expectations that the Fed will be able to deliver its first interest-rate cut later this year. Recent economic releases, like the advanced estimate of first-quarter GDP and the April jobs report, indicate that growth might be softening, while Fed Chair Powell leaned dovish at last week's press conference, suggesting that it is unlikely that the next policy move would be a hike. As a result, the bond market is now once again pricing in two rate cuts for the year*. While we think that the Fed has a bias to cut rates, it remains laser-focused on inflation to shape the path of its policy ahead. Therefore, all eyes will be on the April CPI (consumer price index), which is released a week from today. Expectations are for core inflation, which excludes food and energy, to cool to a 0.3% monthly gain after three straight months of 0.4% increases, which would be the first step in establishing a pattern of better readings that would be more consistent with moderating prices*. On an annual basis, core CPI is expected to tick down to 3.6% from 3.8%, and headline CPI is projected to decline to 3.4% from 3.5%*. 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.

Angelo Kourkafas, CFA
Investment Strategist

^*FactSet