Updated 4/22/2024
Equities fell for a third straight week as investors wrestled with expectations of the Fed’s future monetary policy, a possible intensification of the Iran-Israel conflict, and corporate earnings potential. The price change of select U.S. indexes for the week was: S&P 500 (-3.05%), Dow (+0.01%) and the Nasdaq (-5.52%). The 10yr. Treasury note yield rose 0.12 percentage points to 4.62%.
After a 25% sprint higher in five months, the S&P 500 index has been showing signs of fatigue since the start of Q2. Last week, the mega-cap and semiconductor trade that became a ‘safe haven’ for investors during times of rate uncertainty, lost momentum and broke down. Of the 11 major sectors in the S&P 500, the technology sector was the worst performer, falling -7.3%. Utilities, consumer staples and financials were positive over the week.
Although it seems counterintuitive, equity prices are struggling in response to the steady stream of surprisingly strong economic data. Thus far, the economy has been able to maintain a higher-than-expected employment rate while the rate of inflation slowed. However, the more recent reports have suggested the consumer is not slowing down his/her activity as much as it was expected, making it increasingly difficult for the Federal Reserve to move away from its restrictive monetary policy without possibly overstimulating the economy and driving inflation higher.
On Monday, the government reported retail sales were up 0.8% in March compared to February, and up 3.6% from the same period last year. This also included an upward revision to the February figures to show a 0.9% monthly gain instead of the 0.6% reported. Sales at restaurants, which are considered a good economic indicator, also rose 0.4% and are up 6.5% in the past year.
The strong retail data lifted forecasts for Q1 2024 GDP. Markets are now pricing in 1 to 2 rate cuts this year, which is in-line with what the FOMC members seem to be thinking as well.
Also contributing to the volatility over the week was the uncertainty around Israel’s anticipated response to Iran’s recent missile and drone attack. Israel vowed it would respond and did so on Thursday evening with what was ultimately determined to be a scaled back event.
Following the initial reports of the strike, oil prices jumped more than 3% late Thursday night before trading lower after Iran downplayed the attack. Iran previously warned Tehran would deliver a "severe response" to any hostile action taken by Israel, but fears of escalation were subdued after a senior official said Iran as looking at it more as an "infiltration" rather than an "external attack". Iran didn’t indicate any plans for an immediate retaliation and instead downplayed the military activity.
On Friday, Microsoft, Apple, and Alphabet each fell by about one and a quarter percent, while Amazon slid by -2.56%, Meta shed -4.13%, and market darling Nvidia dropped -10.00%.
Looking Ahead:
We are anticipating a very busy week of economic data points, corporate earnings, and headlines out of Washington. The Fed will be in a quiet period ahead of next week’s meeting.
Key reports this week include the initial look at Q1 GDP and the Personal Income and Outlays (PCE Index) which we’ve noted is the Fed’s preferred inflation read.
According to FactSet, roughly 14% of the S&P 500 companies have reported quarterly results. Of those that reported, 74% have reported actual EPS above estimates, which is below the 5-year average of 77% but equal to the 10-year average of 74%. In aggregate, companies are reporting earnings that are 7.8% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the fourth quarter is 0.5% today, compared to an earnings growth rate of 0.9% last week and an estimated earnings growth rate of 3.4% at the end of the first quarter (March 31).
Reporting kicks into high gear this week as 158 S&P 500 companies (including 11 Dow 30 components) are scheduled to report results for the fourth quarter. This includes reports from Verizon, UPS, GM, Visa, AT&T, Boeing, Ford, Caterpillar, Chevron, Exxon, and a few of the heavy weights…Tesla, Meta, Alphabet, and Microsoft.
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