05/06/2024 Market Strategy
The Song Remains the Same
Equity Markets Closed Higher After the Fed Reasserted Their Monetary Policy Goals
Key Takeaways
- With four-fifths (401 firms or 80%) of the companies in the S&P 500 index having reported Q1 results, earnings are up 5% overall on the back of 4.2% revenue growth. Of the 11 sectors, eight show positive earnings results with three sectors posting double-digit earnings growth and three others showing negative double-digit earnings growth.
- Better than expected Q1 S&P 500 earnings and the recent pullback in stock prices brought P/E multiples of several key US benchmarks back to attractive levels in our view.
- Last week’s nonfarm payroll report and ISM surveys suggest to us that the economy may have slowed in April.
A relatively light calendar of US economic data scheduled for this week will most likely find stateside market participants closely tuned into earnings results of the 54 companies of the S&P 500 reporting along with any guidance from corporate managers in conference calls that follow as to what may lie in the balance of the year for widely followed names.
Also on the radar screen and the subject of much attention by investors and market observers will be a busy calendar of Treasury auctions this week after yields priced by the bond market moved lower on the April jobs, wages and unemployment numbers released last Friday.
The question on many bond market participants’ minds these days tends to be how successful will the current Treasury auction be considering the dollar amounts to be raised by the government and the seemingly ever changing prospects that lie ahead for or against a Fed rate cut with sticky inflation remaining elusive to the Fed’s 2% inflation target.
Better than expected Q1 S&P 500 earnings and the recent pullback in stock prices brought P/E multiples of several key US benchmarks back to attractive levels in our view (see page 11 for our detailed valuation tables and commentary).
The operative expression in what we derive from the Fed’s missives continues to be that the Fed’s benchmark rate is likely to remain at current levels for an indefinite period or “for longer than expected at current levels” rather than for rates to move “higher for longer.”
The Fed’s data dependency continues in our view to be the best course of action to dealing effectively with the vexing sticky inflation that was seen over the course of the first three months of this year.
As much success as the Fed has had thus far in bringing the rate of inflation down (from near 10% to a little over 3%) since it started raising rates over two years ago the economy has been able to remain remarkably resilient as business and the consumer navigate through the process of the current rate hike cycle.
As complex as the process of central bank action against untoward levels of inflation can be, Jerome Powell’s Fed has managed to be adept at navigating the current hike cycle towards achieving the central bank’s two-pronged mandate to provide sustainable economic growth (with manageable levels of inflation) and full employment (defined as somewhere between 3-4% unemployment) thus far without pushing the economy into recession.
We can’t help but think that the advanced nature of technology in this rate hike cycle likely contributed better quality economic data, corporate data, and the process of analysis which overall benefited the Fed, business, the consumer and the markets in navigating the process.
While the risk of recession could increase the longer it takes to bring sticky inflation in check, the extent of the rate hikes and pauses since March of 2022 and the subsequent effectiveness of the Fed’s actions to date suggest to us the Fed stands a good chance of delivering the goods this cycle without a recession.
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