- Canadian stocks rally on bank earnings; U.S. markets finish lower: Stocks were mixed on Thursday, with the TSX posting a healthy 0.7% gain while the S&P 500 closed lower by 0.6%. Domestic stocks rallied on positive earnings results from RBC and CIBC, both of which exceeded expectations. Contrarily, the weakness in U.S. markets was driven by a decline in the technology sector following disappointing guidance from software company Salesforce, which reported quarterly results after market close yesterday. Bond yields closed lower, with the 10-year GoC yield down to 3.7% and the U.S. 10-year yield down to around 4.55%.* The move lower in bond yields followed downward revisions to first-quarter U.S. real GDP data that showed the economy expanded at a 1.3% quarterly pace versus initial estimates of 1.6% growth.* Overseas, Asian markets were lower overnight, while European markets were higher in response to a better eurozone economic-sentiment reading compared with the prior month. In the commodity space, oil prices closed lower, finishing around $78 per barrel, while gold prices were roughly flat.*
- First-quarter GDP data in focus: Market focus will shift to domestic first-quarter GDP data, which will be released on Friday. Expectations are for real GDP to grow 2.2% on a quarter-over-quarter annualized basis, up from the 1% reading in the fourth quarter of last year. The Canadian economy showed signs of fatigue in 2023, with real GDP growing by 1.1% year-over-year for the full year, which, excluding 2020, was the lowest reading since 2016.* Higher interest rates have weighed on both domestic consumption and investment, as evidenced by sluggish household consumption growth in 2023, which rose by 1.7% year-over-year, the lowest rate since 2020, and by residential investment, which contracted by over 10% in 2023.* Looking ahead, we expect Canadian GDP will remain positive in 2024 but likely lag that of the U.S., as higher borrowing costs weigh on domestic demand. One potential catalyst for improving domestic economic activity would be interest-rate cuts from the Bank of Canada (BoC). With inflation trending lower and signs of slowing economic activity, we believe the BoC will have a case to cut rates sooner than the Fed, with the first BoC rate cut perhaps coming at the July meeting. In our view, BoC rate cuts could support domestic economic growth later in 2024 and into 2025.
- Markets eye U.S. inflation data: In addition to the Canadian first-quarter GDP reading, tomorrow will bring a read on U.S. inflation trends with the release of April personal consumption expenditures (PCE) inflation. Expectations are for headline PCE to rise by 2.7% year-over-year, unchanged from the prior month, while core PCE (which excludes food and energy) is expected to rise by 2.8% year-over-year, also unchanged from the prior month.* While the U.S. April consumer price index (CPI) report, which was released earlier this month, provided evidence that inflation is moderating, this came after a string of three consecutive higher-than-expected inflation readings. In fact, the three-month annualized change in core PCE rose to 4.4% in March, up from just 1.6% in December 2023.* The primary culprit behind the elevated U.S. inflation in the first months of 2024 has been stubborn services inflation, whereas PCE goods inflation contracted on a year-over-year basis in January and February and posted a modest 0.1% gain in March. Our view is that services inflation should moderate over the coming months, perhaps aided by easing labour-market conditions and lower shelter costs. We believe lower inflation should pave the way for one or two interest-rate cuts from the Fed in the back half of the year.
Brock Weimer, CFA
Associate Analyst
*FactSet
Wednesday, 5/29/2024 p.m.
- Stocks decline in response to mixed earnings data and higher bond yields: Stocks closed lower on Wednesday, with mixed earnings results and higher bond yields weighing on risk appetite. The S&P 500 shed roughly 0.8% on the day while the TSX underperformed, declining by over 1.5%.* Bond yields finished the day higher, with the 10-year U.S. Treasury yield back above the 4.6% mark.* The move higher in yields to start the week has been attributable to weak U.S. Treasury auctions and hawkish Fed commentary that signaled interest rates could have to stay higher for longer to tame inflation. Domestic bond yields finished higher as well, with the 10-year GoC yield ticking up to 3.75%.* On the corporate front, domestic bank earnings were center stage. Bank of Montreal reported earnings below consensus expectations, driven by higher-than-expected credit costs, while National Bank of Canada reported earnings that exceeded expectations, supported by strength in the bank's wealth-management division.* CIBC and RBC will wrap up earnings for the Big Six banks on Thursday. Overseas, Asian markets were mostly lower overnight, and European markets followed suit, trading lower in response to mixed German inflation data. In the commodity space, oil prices finished lower, closing at around $79 per barrel while gold declined roughly 0.8%.*
- First-quarter earnings season winds down: First-quarter earnings season is coming to a close, with roughly 96% of the S&P 500 and 92% of the TSX having reported results. S&P 500 earnings are on pace to grow by roughly 6% year-over-year in the first quarter, which, if achieved, would be the strongest pace of quarterly growth since the second quarter of 2022.* At a sector level, it's been familiar faces driving the strong corporate profit growth, with the information technology, communication services and consumer discretionary sectors all on pace for 20% or better year-over-year earnings growth for the first quarter.* We have, however, seen strong earnings growth outside of the growth-oriented sectors mentioned above, with utilities on pace to grow first-quarter earnings by 30% year-over-year and financials on pace for 9.4% growth.* Earnings in the TSX have been less robust, with current estimates calling for a modest 0.1% year-over-year rise for the first quarter compared with expectations for 2.4% growth at the end of March.* The divergence in earnings growth is largely attributable to softer domestic economic data and the composition of the TSX, which is tilted toward cyclical sectors and has less exposure to technology. As we mentioned in our recent Weekly Market Wrap, we believe the economic backdrop will remain accommodative for corporate profit growth, particularly in the U.S., which should support stock performance in the months ahead.
- A check on performance: The old adage "sell in May and go away" has served as poor advice for investors thus far in May. The S&P 500 is up nearly 5% for the month through Tuesday's close and is on pace for the best month since November 2023.** The TSX has seen strong performance as well, rising by roughly 2.5% over the same time period. We've seen strong performance from both overseas developed and emerging-market stocks as well, with both the MSCI EAFE and MSCI EM Indexes higher by roughly 3% in May. After a challenging April, which saw Canadian investment-grade bonds decline 2.2%, the Bloomberg Canada Aggregate Bond Index has risen roughly 1.2% in May, helping recoup some of last month's losses. We believe U.S. economic growth could soften but will likely remain positive, creating an attractive backdrop for U.S. equity markets in the months ahead. Within our opportunistic asset-allocation guidance, we recommend clients underweight international bonds and overweight U.S. small- and mid-cap stocks, as appropriate with their long-term goals. In addition, we favour the relative quality and ongoing momentum of U.S. large-cap stocks to Canadian large-cap and emerging-market stocks.
Brock Weimer, CFA
Associate Analyst
*FactSet**FactSet, returns expressed in Canadian Dollar terms
- 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