- 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
- Stocks were little changed after reaching records – The TSX finished at a record high helped by a rally in commodity prices, while U.S. equity markets were mixed, with major indexes fluctuating around the flat line. The Dow reached a milestone yesterday, with the index briefly exceeding 40,000 for the first time, as a moderation in inflation and growth added some confidence that the Fed will be able to cut interest rates in the back half of the year. Corporate earnings have also been a strong pillar of support for markets, with results exceeding expectations for the first quarter. While the earnings season is almost over in U.S., investors will be paying close attention to Canadian bank earnings and NVIDIA, which is the last of the mega-cap tech names to report results. The company, which sits at the epicenter of the AI development and with its shares up 90% year-to-date, is scheduled to report earnings on Wednesday*. Elsewhere, GameStop shares fell more than 20% after the company announced plans to sell additional shares following the recent price surge tied to another twist in the meme stock craze*. The company also reported preliminary results that showed a drop in first-quarter sales.
- China takes measures to prop up ailing property market - China announced today sweeping measures to stabilize its housing market, helping the MSCI China index rally to a nine-month high*. The support package includes lower down-payment requirements for homebuyers and $42 billion of central-bank funding to help local governments buy excess inventory from developers. Those properties would then be converted into affordable housing. The measures aim to help reduce inventory, restore confidence, and ease the pressure on developers. In our view, the newly announced initiatives are an important step that shows the government's determination to address the real estate crunch, which has been a major drag on the country's economic growth. However, confidence might take a while to be restored, as inventory remains high and consumer confidence low. Reflective of this dynamic, home prices in April recorded the steepest monthly decline in 10 years and were down 6.8% from a year ago*. We expect a gradual improvement in China's growth trends, but we favour overseas developed equities over emerging-market stocks.
- Market rally continues with broader shoulders - This week's inflation data provided some relief and helped markets reach new highs as disinflation resumed after three months of accelerating price growth. The data also validated the Fed's stance of not considering further rate hikes, but at the same time signaling patience, as it continues to hold rates in restrictive territory. If the disinflation trend has simply been delayed rather than derailed, as is our view, we think there is significant upside in parts of the equity market that have been left behind, and we have started to see evidence of that. Over the past three months the Nasdaq 100, which represents the U.S. mega-cap stocks, has lagged the S&P 500, which in turn has lagged U.S. mid-cap stocks and other major overseas equity indexes. Sector leadership is also showing a similar trend, with eight of the 11 S&P 500 sectors outperforming the index, signaling broader market support compared with last year's narrow gains, where only three sectors outperformed*. We think the combination of rising corporate profits, the continued economic expansion, and the potential for more downside than upside in yields provides a positive backdrop for markets as the bull market continues.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet