Daily market snapshot

• 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

• U.S. stocks finish mostly higher: U.S. equity markets were mostly higher Monday, with the S&P 500 gaining 0.1% and the Nasdaq gaining roughly 0.6%.* Domestic markets were closed in observance of the Victoria Day holiday. At a sector level, technology was the top-performing sector, gaining over 1%, while consumer discretionary and financials were among the laggards today.* The technology sector received a boost from semiconductor company NVIDIA, which finished higher by over 2% today ahead of its highly anticipated earnings release on Wednesday.* Bond yields finished higher across the curve, with the U.S. 10-year yield closing around 4.44% and the 2-year yield ticking up to 4.85%.* Overseas, Asian markets were higher overnight, with Chinese stocks adding to strength from last week following the announcement that policymakers would take action to support the Chinese property market. In the commodity space, oil prices finished lower, closing around $79 per barrel, while gold logged a 0.6% gain.*
• Markets eye full week of corporate earnings: Corporate earnings will remain in focus this week, with a number of retailers, including Lowe's, Target, TJX and Ross, all scheduled to report. Additionally, this week's most anticipated event will likely be earnings from technology heavyweight NVIDIA, which will be out on Wednesday. Roughly 93% of the S&P 500 has reported thus far, and earnings on pace to grow 5.5% year-over-year, better than the estimated 3% growth at the end of March.* Roughly 80% of companies that have reported have exceeded earnings expectations, with an average upside surprise of about 7.9%, which would be the largest average upside surprise since the fourth quarter of 2021, if it holds.* At a sector level, earnings growth has been broad-based, with eight of 11 sectors in the S&P 500 expected to see positive earnings growth in the first quarter. Communication services, utilities, technology and consumer discretionary have led the way, with each sector on pace to grow earnings by over 20% in the first quarter.* Full-year estimates are calling for the S&P 500 to grow earnings by 10.8% in 2024, up from estimates of 10.6% at the end of March.* We see limited scope for current S&P 500 valuations to expand, and we believe healthy corporate profit growth will be a necessary ingredient for continued strength in equity markets in 2024.
• U.S. housing-market data in focus: This week will provide a read on trends within the U.S. housing market, beginning with Wednesday's release of existing-home sales for April. Expectations are for existing-home sales to be at a seasonally adjusted annual rate of 4.2 million in April, little changed from the 4.19 million reading in March.* New-home sales will be out on Thursday, with expectations for April new-home sales to be at a seasonally adjusted annual rate of 672,000, lower than the March reading of 693,000.* Existing-home sales have been below the long-run median of 5.3 million since 2022, in part due to low supply of existing homes for sale due to current homeowners showing reluctance to sell their home and forfeit low mortgage rates that were locked in prior to 2022. While existing-home sales have been soft, new-home sales have hovered around their long-run median of 654,000 for much of the past two years.* On the price side, home prices have rebounded following a period of weakness in mid-2023, with the S&P Case-Shiller Nationwide Home Price Index rising 6.4% year-over-year in the most recent reading.* One clear beneficiary of the tight supply of existing homes for sale has been homebuilders, with the S&P 1500 Homebuilders Sub-Index gaining 96% since the beginning of 2023, over double the S&P 500's 38% gain.* We expect housing supply and demand to move toward a better balance. We believe the Fed will cut interest rates later this year, potentially leading to lower mortgage rates and bringing more supply to the market through additional construction and more inventory of existing homes for sale. We'd expect home-price growth to remain positive but perhaps recede toward the pace of wage growth over time.
   

Brock Weimer, CFA
Associate Analyst 

^*FactSet