Daily market snapshot

• Stocks gain ground to kick off the week – After a tough week in which the S&P 500 shed 3% and the TSX fell a more muted 0.4%, equities found some footing on Monday, both in the U.S. as well as overseas, where European and Asian markets were higher. Bond yields were little changed, with the 10-year rate holding near 3.75%, slightly below the recent high but notably higher over the past few weeks.  Gold and oil prices were lower to start the week, with the former likely backing off as risk appetite picked up today, while the latter responded to the lack of escalation in the Middle East conflict. The technology and financial services sectors were the largest gainers on Monday, reflecting a return of optimism as last week's beaten-up areas regained some ground.*    
• Earnings in focus – Earnings season is in full swing, with the spotlight poised to intensify in the days ahead, as Tesla, Alphabet (Google), Microsoft and Meta (Facebook) will announce quarterly results between Tuesday and Thursday. Expectations remain high for this mega-cap tech cohort, but with the Nasdaq off more than 5% last week, some dose of caution may be setting in ahead of these earnings releases. Despite an 8% pullback in the S&P 500 technology sector over the last month, it shouldn't be lost that this group is still up more than 3% on the year and 19% over the last six months. Meanwhile, the other standout group, the communication services sector, has gained 14% year-to-date and 23% since last October.* While earnings from the so-called Magnificent 7 group will be in focus, the broader earnings picture will, in our view, be a key driver (and we think, pillar of support) for market performance over the balance of 2024.
• The week ahead – It was a particularly quiet day on the economic-data calendar, but things will pick up significantly as we move through the week. We're somewhat in the void between employment and CPI inflation reports, and Fed officials are now in the blackout period for public commentary until the next rate announcement on May 1, but markets will process incoming data through the lens of implications for economic growth and central-bank policy ahead. We'll get the latest U.S. PMI manufacturing and services surveys on Tuesday, Canadian retail sales on Wednesday, and then the first look at first-quarter U.S. GDP on Thursday. But the clear headliner for the week will come on Friday with the release of the March U.S. personal consumption expenditures (PCE) inflation data. While the consumer price index (CPI) report gets most of the attention, the core PCE measure is the Fed's preferred gauge of inflation. Thus, Friday's report will, in our view, be influential to the market's direction as we sit in the intersection between the sharp rally of the last several months and the pullback of the last several days. The PCE report is expected to show a slightly more favourable trend in inflation south of the border, which would be a welcome (if not necessary) sign given the last few U.S. CPI reports have painted a more uncomfortable picture in which the improvement in inflation has seemingly stalled. Conversely, domestic inflation has been more muted recently, supporting the potential for the Bank of Canada to cut rates as early as this summer.

Craig Fehr, CFA
Investment Strategy

^*FactSet 

• Markets mixed as geopolitical tensions remain in focus – Stocks finished broadly mixed on Friday. The TSX held up, thanks to gains in the energy and financial sectors, while the Dow closed higher, thanks to a strong gain in shares of index member American Express. The S&P and Nasdaq both finished notably lower on the day due to weakness in the technology sector. News of an Israeli retaliatory strike on Iran kept geopolitical uncertainties elevated heading into the weekend, with investor sentiment remaining in a "risk off" position that has emerged in recent weeks from the combination of the conflict in the Middle East and an increasing realization that uncooperative U.S. inflation trends will likely push back the Fed's timetable for rate cuts. Oil prices were little changed on the day and were down notably for the week, which we think indicates that the oil markets are already pricing in a fair degree of uncertainty as well as the prospects that idle supply could be brought online if Iranian production is impacted. Government bond yields were lower and gold prices rose, reflecting the defensive posture across financial markets. *
• Earnings season underway – First-quarter earnings announcements for the S&P 500 have begun, with Friday's earnings spotlight shining on results from Netflix, Procter & Gamble and American Express, each of which offered a fresh read-through for broader market trends. Netflix beat consensus expectations on the top and bottom lines, but forward guidance appears to have underwhelmed, which we think is an indication of the high bar of expectations in the technology and communication services sectors. These expectations have been reflected in the significant outperformance for those areas over the last year. P&G's and Amex's results provide a fresh look at the state of the consumer, with the former raising its earnings growth projections on a solid demand outlook while also indicating that higher prices are showing up in consumer buying habits. We expect overall earnings growth to set the pace for market performance over the course of 2024. Consensus expectations are calling for roughly 10% profit growth for the S&P 500 this year*, which we think is reasonable but will also require ongoing economic resilience.
• Perspective on market pullback – After a steady rally from October to the beginning of April, the stock market has shown its first signs of fatigue recently. The TSX and S&P 500 were lower on the week, marking the third straight weekly loss, the first such streak in over five months. Volatility rarely feels comfortable, but perspective is useful here. Stocks are down only modestly from all-time highs. For context, equities have historically experienced two 5% dips per year, on average, so this bout of weakness is, in our view, normal. Moreover, after the sharp and steady rally over the last several months*, we think a breather is to be expected, if not healthy. The technology sector, which has been a runaway leader for the market over the last year, is among the laggards during this pullback, which we believe reflects some normal rebalancing within the market, instead of signaling something more structural or worrisome about the outlook. We wouldn't rule out some additional ongoing volatility as markets continue to assess the inflation and central-bank policy outlook, as well as the tenuous situation in the Middle East. But we think the underpinnings of this bull market remain in decent shape, making temporary pullbacks, in our view, a compelling buying opportunity.

Craig Fehr, CFA
Investment Strategy

^*FactSet 

• Stocks remain on the defensive, U.S. dollar strengthens - Caution persisted today in Canada and U.S. equity markets, which posted their biggest decline since October driven by a mix of elevated geopolitical risk, inflation worries, and earnings disappointments. The March U.S. inflation data released earlier in the week and ahead of the Canadian data next week put some doubt that the expected Fed rate cuts will be delivered, and yields rose sharply, pressuring bonds. However, yields declined today on concerns of an Iranian retaliatory strike. Investors also parsed U.S. big bank earnings, which kicked off the earnings season. Shares of JPMorgan declined more than 5% as banks missed estimates for net interest income. Shares of Citigroup reversed their earlier gains after its first-quarter profit exceeded estimates. Elsewhere, European stocks outperformed, as expectations grew that the European Central Bank (ECB) will start cutting rates in June. The likely diverging policy with the ECB and BoC cutting rates before the Fed is helping the dollar rally to a five-month high against other major currencies. The loonie fell to its lowest since November against the U.S. dollar*. Oil prices finished slightly higher amid tensions in the Middle East.
• Inflation worries trigger a rate-cut rethink - The hotter-than-expected U.S. CPI for the third straight month triggered concerns around interest rates remaining higher for longer. With the economy remaining strong and progress on disinflation stalling, investors are pushing back and trimming the expected Fed rate cuts. Bond markets are now pricing between one and two rate cuts by the end of the year, compared with six just three months ago*. That adjustment pushed the 10-year Treasury yield to its highest since November before pulling back some the last two days*. The bumpier-than-expected inflation path likely introduces more volatility for both bonds and equities and could be the catalyst for markets to take a breather after five months of strong gains. 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.
• U.S. banks kick off first-quarter earnings - In addition to the outlook for central-bank policy, the trends in corporate profits will take center stage in the weeks ahead. Big U.S. banks are among the first to report earnings for the first quarter, with JPMorgan, Wells Fargo and Citigroup results out this morning. The market reaction was negative, but the financial services sector traded mostly in line with the market. The improvement in the macroeconomic outlook and a resilient consumer support bank earnings, but profit pressures and issues with commercial real estate persist. More broadly, expectations are for S&P 500 earnings to grow about 3% for the quarter, validating the reacceleration in profits this year after a flat 2023*. In our view, at- or above-trend U.S. economic growth, together with rising earnings, can sustain the bull market, even with fewer Fed rate cuts. We wouldn’t be surprised if the start of the second quarter coincides with a run-of-the-mill correction or pullback, but we would view any potential weakness as an opportunity, given the still-positive economic and corporate fundamentals.

Angelo Kourkafas, CFA
Investment Strategist

^*FactSet

• Stocks finish mixed: Equity markets were mixed on Wednesday, with the S&P 500 declining roughly 0.6%, while the TSX finished the day higher by about 0.1%. Today's modest gain in the TSX broke a streak of five consecutive daily declines. At a sector level, leadership struck a defensive tone, with defensive sectors, such as utilities and consumer staples, among the top performers of the S&P 500, while technology lagged, shedding about 1.7%.* The technology sector was pressured by disappointing guidance from semiconductor equipment manufacturer ASML in its first-quarter earnings report.* Overseas, European markets finished mostly higher despite a higher-than-expected U.K. inflation reading.* Treasury yields finished lower, with the 10-year GoC yield finishing around 3.7%, while the 10-year Treasury yield declined to 4.58%.* Despite elevated geopolitical concerns, oil prices declined for the third consecutive day, closing at around $83 per barrel.
• Earnings check-in: First-quarter earnings are underway, with roughly 10% of the S&P 500 having reported thus far. Expectations are for S&P 500 earnings to grow by roughly 1% year-over-year in the first quarter, down from an estimated 3% growth rate at the end of March.* Looking ahead to the full year, expectations are for earnings to grow by roughly 10% year-over-year in 2024, with the information technology, communication services and financials sectors expected to see the strongest growth.* Earnings within the TSX will ramp up over the coming weeks, with only 3% of companies in the index having reported thus far.* Expectations are for first-quarter earnings of the TSX to be roughly flat year-over-year and for full-year earnings to grow by about 4%.* With the S&P 500 rallying over 20% in 2023 while earnings growth was roughly flat on the year, much of last year's gain was attributable to valuation expansion. We see limited scope for current S&P 500 valuations to meaningfully expand, and therefore we believe healthy corporate earnings growth will be a key ingredient for stocks to continue to perform well for the remainder of the year.
• Second quarter off to a slow start: After rallying by over 10% in the first quarter, returns in the month of April have been less appealing for the S&P 500, with the index lower by about 4.4%.* Each sector has moved lower for the month except communication services, which has posted a gain of less than 1%. The TSX has fared slightly better, with the index down just over 2% month-to-date.* Performance of investment-grade bonds has been lackluster as well, with the Bloomberg U.S. Aggregate Bond Index lower by nearly 3% month-to-date, while the Bloomberg Canada Aggregate Index is lower by roughly 2%.* Hotter-than-expected U.S. inflation has driven the U.S. 10-year Treasury yield nearly 0.3 percentage points higher month-to-date, while the 10-year GoC yield has gained roughly 0.12 percentage points. Higher domestic and U.S. yields have been contributing factors to the pullback in stocks and bonds this month. Elevated geopolitical risks stemming from the Israel-Iran conflict have further contributed to risk-off sentiment in equity markets in recent days. We'd remind investors that market pullbacks are normal, and on average the S&P 500 experiences about three 5% pullbacks per calendar year.** We believe the outlook for equity markets is constructive, particularly in the U.S., and we recommend investors use pockets of volatility to add to quality investments in line with their financial goals. 

Brock Weimer, CFA
Associate Analyst 

^{*FactSet
**FactSet, Edward Jones.}