- Rise in yields weighs slightly on equities - After the U.S. holiday yesterday, major indexes opened slightly higher Tuesday but finished mostly lower, weighed by a rise in government bond yields. A pair of weak U.S. Treasury auctions and hawkish Fed commentary were the catalysts for the benchmark 10-year to rise back above 4.5% in the U.S. and approach 3.7% in Canada. Nonetheless, the tech-heavy Nasdaq was able to eke out a gain, helped by a rally in shares of NVIDIA, which added to its post-earnings advance. In Canada, Scotiabank was the second of the big banks to report earnings after TD last week. Earnings topped estimates on strength in capital markets and wealth management. BMO's and National Bank's results are scheduled to be released on Wednesday, followed by CIBC and RBC on Thursday. Elsewhere, WTI oil rallied 3% today after rising 1% yesterday, driven by heightened geopolitical tensions in the Middle East. However, prices remain around $80 and in the middle of the past 12-month range*.
- Innovation is alive and well, but diversification also matters - Enthusiasm around artificial intelligence, or AI, drove the Nasdaq to new record highs last week and has helped U.S. stocks more than reverse their April losses. Shares of NVIDIA, which is the AI industry leader now, jumped last week, as the company results exceeded the high bar of expectations and showed that AI computing spending remains strong. We think that AI has the potential to boost productivity as it is applied across different sectors of the economy, but this is not going to happen overnight. At this stage, it is the enablers of this technology that reap the benefits, but over time the gains can spread to companies that can apply it effectively to improve existing processes. While the tech sector is leading U.S. sector performance so far this month, the gains are broader compared with last year, with 10 of the 11 sectors higher (the only sector lower is energy). Overseas equity markets have also started catch up to the U.S., with major indexes in Europe, the U.K. and China keeping up with, and in some cases outperforming, the S&P 500, as the U.S. dollar has softened and global growth is improving.
- Fed's preferred measure of inflation and Canada GDP in focus this week - The economic and earnings calendar is light this week, with the core PCE inflation (personal consumption expenditures price index) and Canada GDP being the highlights on Friday. Expectations are that the Fed's preferred measure of inflation will increase 0.2% month-over-month in April following a 0.3% increase in March, leaving the annual rate unchanged at 2.8%*. While progress in inflation stalled the first three months of the year, the downtrend remains in place, which suggests to us that the Fed will be able to deliver one or two rate cuts in the back half of the year. Some uncertainty around future Fed policy and November’s presidential election could be catalysts for volatility in the months ahead. But the combination of rising corporate profits, the continued economic expansion, and the potential for lower yields later in the year provides a positive backdrop for markets, in our view.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet
- Stocks close higher: Stock markets closed higher Friday, with the TSX recovering some of its losses from earlier in the week, and the S&P 500 up for the week. The tech-heavy Nasdaq closed at a new all-time high. U.S. stocks were down in recent days on expectations of fewer Fed rate cuts this year, driven by the stronger-than-expected Purchasing Managers' Index (PMI) report yesterday. Durable goods orders released this morning were also above consensus estimates. Canada retail sales for March came in weaker than expected, down 0.2%, with sales lower in seven of the nine subsectors. U.S. small- and mid-cap stocks led U.S. large-cap stocks on the day*. Sector performance was broad, led by communication services, technology and utilities*. Health care was the only sector lower for the day. In global markets, both Asia and Europe were down on the prospect of higher interest rates for longer. The U.S. dollar was modestly lower versus major currencies. In the commodity space, WTI oil was up, near $78 per barrel, as the summer driving season starts this weekend. Gold was modestly lower, about 4% below the all-time high reached earlier this week.
- Corporate earnings season winding down: With 96% of companies in the S&P 500 reporting first-quarter earnings results, performance continues to be strong relative to expectations, providing support for the recent rise in stock prices. Of companies that have reported, 80% have beaten analyst expectations, with an average upside surprise of 7.9%*. Year-over-year earnings growth for the first quarter is a solid 6%, the highest rate since the first quarter of 2022*. Earnings growth is forecast to accelerate throughout the year, rising to 11% for the year*. Expectations are for the TSX to grow earnings by roughly 4% for the full year.* The earnings underperformance of the TSX relative to the S&P 500 is attributable to weaker Canadian economic growth and the composition of the TSX, which is tilted toward cyclical industries with less exposure to technology.
- Bond yields about even: Bond yields were about flat for the day, with the 10-year Government of Canada yield at 3.62% and 10-year U.S. Treasury yield at 4.47%. Expectations for fewer Fed rate cuts have pushed U.S. rates higher in recent days. Our view is that continued signs inflation is abating should keep the Bank of Canada on track to cut rates later this summer and the Fed to follow with at least one rate cut later in the back half of the year, which would be favourable for the economy and markets broadly. Lower rates could also increase reinvestment risk for cash and short-term bonds. Extending duration into intermediate- and long-term bonds can help manage this risk by locking in yields for longer.
Brian Therien, CFA
Senior Analyst
*FactSet
- Stocks sell off despite strong NVIDIA earnings report – Stocks markets in the U.S. and Canada were sharply lower on Thursday, with the S&P 500 and Canadian TSX both down by over 0.6%. All S&P 500 sectors were negative except for technology, which moved modestly higher. This comes as the artificial intelligence (AI) giant NVIDIA reported earnings that beat analyst forecasts, provided better-than-expected guidance, and announced a 10-for-1 stock split, effective June 7*. The stellar earnings report initially offered markets some relief, but stronger-than-expected S&P manufacturing and services PMI (purchasing managers index) data raised concerns that Fed rate cuts may be pushed out further. Treasury bond yields climbed higher on Thursday, with the 10-year yield higher by around 0.05%, bringing rates close to 4.48%*. This move higher in yields put downward pressure on interest-rate-sensitive parts of the market, including utilities, real estate, and financials, as well as on dampening bond market returns.
- NVIDIA earnings report underscores broader role of AI in the longer-term bull market – The NVIDIA first-quarter earnings report highlighted that the company continues to see strong demand for its AI chips across multiple sectors and regions. Earnings were up over 460% from a year ago, while guidance for the second quarter exceeded analyst forecasts. In addition, the company announced a 10-for-1 stock split and an increased dividend payout*. Perhaps most importantly, CEO Jensen highlighted that generative AI is expanding to sectors like automotive and health care, beyond the core cloud-service customers. In our view, artificial intelligence broadly remains in early innings of a longer-term bull market. While the early stock gains have been most acutely seen in the enablers of AI, like the semiconductor space, we believe over time the productivity gains will be felt across sectors, including financial services, health care and industrials and manufacturing.
- Markets now pricing just one Fed rate cut in 2024 – After the release of the Fed minutes earlier this week, combined with stronger S&P PMI data on Thursday, markets have adjusted Fed rate cut expectations from two to one rate cut in 2024, most likely in September. While the Fed minutes indicated that FOMC officials remain concerned about the hotter-than-expected inflation readings in the first quarter, data more recently has shown better inflation trends and some moderation in the labour market and consumer. In our view, the Fed will likely need to see two or three better inflation readings before signaling a rate cut, which could be a feasible path for inflation by year-end. Softer labour-market data, weak retail sales, and some corporate earnings that point to a consumer that is pulling back a bit all indicate lower wage growth and potentially softer services inflation. We believe that a combination of easing inflation and moderating economic growth should provide a good backdrop for the start of a Fed rate-cutting cycle, as well as some broadening out in market leadership.
Mona Mahajan
Investment Strategist
*FactSet
- Stocks decline ahead of NVIDIA earnings - After the S&P 500 and the Nasdaq hit new record highs yesterday, equity markets finished lower today. There were no major economic releases, but the release of the Fed meeting minutes sparked higher-for-longer interest rate worries. Shares of Target declined 7% following earnings, with the company noting that consumers feel pressured to make the most of their budget. The release noted a decline in discretionary categories but also pointed out that discretionary sales trends improved versus prior quarters. Elsewhere, European equity markets were lower after the latest U.K. data showed inflation slowing less than expected last month. WTI oil prices were also lower at $78, while government bond yields rise modestly, as markets continue to price in a delayed start to rate cuts for other central banks*. However, yesterday's moderation in Canada's consumer price index (CPI) provided additional confidence that the BoC might cut rates next month or July.
- Earnings season is nearing its end - With 95% of the S&P 500 companies having already released results, the earnings season is nearly complete. NVIDIA is the last of the mega-cap tech names to report today after the market close, and investors will be paying close attention, since the company is the third-largest stock by market capitalization of the index, and it is at the epicenter of AI development. Revenues are projected to grow an impressive 243% from a year ago, but with the stock up 90% so far this year, the bar of expectations is high*. Results from retailers are shedding additional light on the state of the consumer, pointing to still solid demand but also a deterioration in the lower-income consumers and some signs of fatigue on discretionary spending. Overall, the corporate results for the quarter have come in stronger than expected, reinforcing our view that S&P 500 earnings are on track to grow around 10% this year. A strong but gradually slowing economy is supporting healthy revenue growth, while profitability is improving as the increase in input costs is moderating. The key takeaway is that rising earnings provide a strong foundation for the uptrend in stocks to persist.
- Fed meeting minutes highlight concerns on lack of progress in inflation - The focus this afternoon was on the April 30-May 1 Fed meeting minutes as investors seek clues on the path of rates. Yesterday Governor Waller said he needs to see several more good inflation numbers to begin rate cuts, commentary that is consistent with a wait-and-see stance on easing policy that was also reflected in the minutes. While not ruled out if the first quarter upside surprises persist, further rate hikes are less likely. But to pivot to rate cuts, Fed officials need to see the monthly pace of price gains slow. The April CPI, which was released after the Fed meeting, was a good first step in reestablishing a pattern of better inflation readings that would be more consistent with moderating prices. If that continues, we think that one to two rate cuts are possible this year, but likely not delivered before September. Uncertainty around future Fed policy and November’s presidential election could be catalysts for volatility in the months ahead. But the combination of rising corporate profits, the continued economic expansion, and the potential for lower yields later in the year provides a positive backdrop for markets, in our view.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet