05/28/2024 Market Strategy
Don’t Keep Me Wonderin’
Mixed Economic Data Keep Rate Cut Projections in Flux
Key Takeaways
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With 96% (481 firms) of the companies in the S&P 500 index having reported Q1 results, earnings are exceeding expectations. Profits are up 7.7% overall on the back of 4.1% revenue growth. Prior to the start of the season, Bloomberg put bottom-up estimates of Q1 earnings growth at 3.9%.
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Eight of the 11 sectors are showing positive earnings growth, with six up double-digit rates. These include communication services (+41%), utilities (+31%), consumer discretionary (+27%), information technology (+24%), financials (+11%) and real estate (+11%).
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We are tweaking our sector ratings and weightings for the S&P 500.
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We also look this week at the latest inflation readings for developed economies and compare them to a year earlier and find that the spike in inflation was a global phenomenon and the decline in inflation rates varies widely among nations.
Major US equity benchmarks last week delivered mixed performance as the S&P 500 closed flat with a positive bias for the week, the NASDAQ Composite advanced 1.4% in the same period while the Dow Jones Industrial Average declined 2.3% on the week.
Technology stocks led by semiconductors were among last week’s best performers in a period that saw better-than-expected results from a bellwether among the semiconductors that is a leader in AI.
The Dow Jones Industrials likely experienced some profit-taking after posting five consecutive weeks of gains prior to last week’s ebbing. The benchmark also experienced the effects of a decline in the stock of a widely followed name in aerospace on some negative news.
The information technology and the communications services sectors were the only two among the eleven sectors of the S&P 500 to post gains for the week ended last Friday. Economic data released last week showed a pick-up in US services activity and manufacturing output suggesting that stickiness in inflation may persist and thus making it likely the Fed could keep its monetary policy on pause for longer than some market participants had been hoping for.
Bond prices retreated last week on the news of robust May readings sending the yield on the 10-Year Treasury note 4 basis points higher to 4.47% on Friday, May 24. The yield is up 59 basis points thus far from the start of 2024 but off its high for this year of 4.71% reached on April 25.
So Far So Good on Earnings
With 481 (96%) of the S&P 500’s companies having reported results for Q1 through last Friday eight sectors show positive earnings growth with six of those posting double-digit increases.
Just three sectors of the S&P 500’s 11 sectors are showing negative earnings growth as of last Friday. (See page 7 in this report for our Earnings Scorecard).
Nine members of the S&P 500 are scheduled to report this week. They include widely followed names belonging to the information technology and consumer discretionary sectors.
The (Short) Week Ahead
In this holiday abridged week investors will see key economic data for May including the ISM reports as well as the nonfarm payroll survey. The week also brings Q1 results of some widely held and widely followed names in the S&P 500. We expect that details from the companies that have yet to report as well as the economic data results will influence the direction the markets will take.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Some near term profit-taking in the day to day action of the market particularly in segments of the market that have had exceptional run-ups since last year into this year continues to appear to us quite normal. Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and should contribute to the broadening of the markets’ progress from last year through this year.
Near term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition in monetary policy like these and in periods of rising geopolitical risk.
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