- 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
- A quiet day for markets – Domestic stocks were little changed following today's reading on Canadian April inflation, while U.S. equities logged modest gains, as the prevailing narrative continues to be one of general optimism powered by healthy corporate earnings growth and anticipation of easier central-bank policy later this year. The domestic 10-year yield was lower, falling toward 3.58%, as fixed-income markets price in an expected move from the Bank of Canada after this morning's encouraging inflation reading.* Looking around the horn, oil and gold prices were down on the day, while the utility and consumer staples sectors were among the top performers, reflecting a slightly defensive posture within today's muted move.
- Earnings doing some heaving lifting – While markets have been anxious about the fact that expected Fed rate cuts have been pushed to much later in the year, equities are holding on to strong gains, thanks to encouraging corporate earnings trends. With first-quarter result announcements drawing to a close, all eyes this week will be on NVIDIA's results, which are due out after the bell on Wednesday. With the sharp rally in NVIDIA shares, expectations are high, and results are likely to set the tone for the level of enthusiasm that continues to circle around the AI theme. More broadly, the corporate earnings story is a source of support for the markets, with first-quarter results coming in consistent with expectations for healthy profit growth this year. We think this sets a sturdy foundation for market gains in 2024.
- Inflation remains on a favourable path – April's domestic consumer-prices report showed that inflation remains headed in the right direction in Canada. Headline CPI rose by 0.2% month-over-month, bringing the annual change in consumer prices to 2.7%, helped by declines in food and recreation prices, as well as flat clothing prices, compared with the prior month.* Shelter remains the fly in the ointment, with April rent and housing prices rising by a too-high 0.5% rate compared with March. With core inflation (up 0.1% for four consecutive months) still trending in a favourable direction, we think the case for a rate cut from the Bank of Canada is growing stronger. We don't think policymakers are inclined to jump the gun with a June cut. But we do think the BoC will look to ease policy sooner than the U.S. Fed.
Craig Fehr, CFA
Investment Strategist
*FactSet