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WEEKLY MARKET ROUND-UP Thru May 17th 2024; “Interest Rates vs Earnings”

Hey everyone, we are only 2 weeks away from a long holiday weekend here in the US with upcoming Memorial Day and about a month shy of the half-way mark for 2024. Markets are very strong and the key component that could drive markets for the remainder of this year will be where will earnings go against interest rates. Get my take in this week’s market round-up.


Major indexes ended higher with each making new all-time highs as inflation and interest rate worries appeared to dissipate, growth stocks outperformed. S&P 500 YoY earnings growth is coming in at 5.4%, the largest increase in almost two years. But with the S&P 500 trading at around 21x forward earnings, there’s a good argument that Wall Street has already priced in better-than-expected earnings, leaving corporations very little wiggle room for disappointment. Companies that have missed on earnings have seen their shares fall an average of -2.8%, which is higher than the five-year average of -2.3%. And on the flip side of the equation, corporations that have exceeded expectations have only seen shares rise an average of 1%, largely in line with the five-year average of 0.9%. The Federal Reserve may also be influencing the higher bar for U.S. corporate earnings. With falling expectations for rate cuts in 2024, investors have had to factor in a higher discount rate for future cash flows, which is making stocks look more expensive relative to bonds.

The major factor also supporting sentiment appeared to be Wednesday’s release of the Labor Department’s April consumer price index (CPI), which came in at or modestly below expectations, in contrast to hotter-than-expected prints over the preceding three months. CPI rose 3.4% from a year ago, with core prices (excluding food and energy) up 3.6%. Many investors reading these figures may see them as problematic and think “isn’t inflation still well above the Fed’s 2% target?” The short answer is yes, but the important takeaway is that inflation is not re-accelerating—an important distinction for the Fed. At 3.4%, CPI’s year-over-year increase was the lowest it has been since April 2021. In addition, consider that last April, the CPI print was 4.9% year-over-year, which underscores inflation’s gradual but steady trend downward. And finally, Retail sales were flat in April versus consensus estimates of a 0.4% gain, while downwardly revising its estimate of March sales lower, from +0.7% to +0.6%. The data included some evidence that consumers were pulling back on discretionary spending. The downside inflation and growth surprises helped drive the yield on the benchmark 10-year U.S. Treasury note to its lowest level in over a month.

In Europe, ECB policymakers indicated that a rate cut is likely in June but that the path thereafter is uncertain. Eurozone industrial production rose for a second month running in March, increasing 0.6% sequentially.

In Japan, investors appeared to shrug off weakness in their economy, as signaled by a weaker-than-expected Q1 GDP print—a 2.0% annualized contraction on the previous three-month period. The Yen finished the week broadly unchanged in the high-JPY 155 range against the USD. The yield on the 10-year JGB rose to 0.94%, from 0.91% at the end of the previous week.

In China, to boost the real estate market, the People’s Bank of China (PBOC) lowered the minimum down payment ratio by 5% to 15% for first-time buyers and to 25% for second home purchases to ignite demand. The unprecedented support package came as data showed no sign of turnaround in China’s yearslong housing crisis. Inflation data showed that deflationary pressure continued to weigh on China’s economy.

Enjoy this week’s market round-up;

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