- 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
- Stocks close mixed: U.S. stock markets closed modestly lower Thursday, reversing some gains from earlier this week and retreating from all-time highs. The Dow Jones Industrial Average briefly broke 40,000 for the first time but was unable to hold the gain, finishing down for the day*. Small- and mid-cap stocks were also lower, underperforming large-cap stocks*. Sector performance was broadly lower, with only consumer staples up for the day, supported by strong earnings by Walmart*. The TSX was higher for the day. In global markets, Asia closed higher, and Europe was broadly lower on weaker-than-expected corporate earnings. The U.S. dollar was stronger versus major currencies on higher import prices*. In the commodity space, WTI oil was up, closing in on $80 per barrel, driven by lower crude inventories and strong demand*. Gold was modestly lower, reversing some gains from recent days.
- Corporate earnings season winding down: With earnings starting to shift toward retailers, Walmart announced its first-quarter results this morning, beating earnings expectations on higher e-commerce and comparable-store sales*. The company also grew its sales to higher-income consumers, likely reflecting the impact of lingering inflation. With 92% of companies in the S&P 500 having reported first-quarter earnings results, performance has been strong relative to expectations, providing support for the recent rise in stock prices. Of the companies that have reported, 78% have beaten analyst expectations, with an average upside surprise of 7.5%*. Year-over-year earnings growth for the first quarter is 5.4%, which is the highest rate since the second quarter of 2022*. Earnings growth is forecast to accelerate throughout the year, rising to 11% for the year*. Sector performance is broad, with eight of the 11 sectors reporting year-over-year earnings growth*. We believe the continued broadening of earnings performance should allow lagging sectors to catch up and help extend the economic expansion.
- Bond yields higher: U.S. Treasury yields were modestly higher, with the 10-year yield at 4.38%, down about 0.3% from the recent highs in April. The 10-year GoC yield ticked down to 3.57%, extending the decline of about 0.3% in recent weeks. The favourable inflation report yesterday bolstered expectations that the Fed should be able to cut rates later this year. Our view is that continued signs inflation is abating should keep the BoC on track to cut rates this summer, and the Fed on track to follow in the back half of the year, which would be favourable for the economy and markets broadly.
Brian Therien, CFA
Senior Analyst
*FactSet
- Stocks rally in response to favourable U.S. inflation data: Equity markets finished higher in response to the April U.S. consumer price index (CPI) reading that showed inflation slowed from the prior month. Headline CPI rose 3.4% year-over-year compared with the prior reading of 3.5%.* The S&P 500 finished higher by 1.2% while the TSX lagged, gaining only 0.2%.* Sector leadership was balanced, with most sectors of the S&P 500 finishing higher, led by information technology and real estate.* Overseas, Asian markets were mixed overnight, as the People's Bank of China held its key policy rate steady, while European markets were mostly higher following a stronger-than-expected eurozone industrial production reading.* The favourable U.S. inflation report, along with softer-than-expected U.S. retail-sales data, drove bond yields lower, with the 10-year GoC yield ticking down to 3.57% while the U.S. 10-year yield closed around 4.35%.*
- U.S. inflation cooled in April: Inflation and its potential impact on monetary policy was center stage for markets today with the release of U.S. April CPI data. Headline CPI rose by 0.3% month-over-month versus expectations for a 0.4% gain.* Core CPI, which excludes food and energy, rose by 0.3% month-over-month, which was in line with expectations. On a year-over-year basis headline CPI rose by 3.4% while core CPI rose by 3.6%, the lowest reading since April 2021.* Additionally, the services component of CPI, which has run stubbornly high recently, rose by 0.4% month-over-month, the lowest reading since December.* Today's reading is a step in the right direction for the Fed to begin cutting rates. However, we believe it will take several more months of lower inflation before the Fed gains confidence that inflation is sustainably headed toward its 2% target and opts to cut rates. To that end, we expect inflation will continue to trend lower, and we believe the Fed could have a credible case to cut interest rates one or two times later this year. Next Tuesday will provide a read on domestic inflation trends with the release of April CPI data.
- U.S. consumer showing signs of fatigue: U.S. retail-sales data out this morning suggest that consumers showed signs of fatigue in April. Headline retail sales were roughly flat month-over-month while control-group retail sales, which excludes spending on volatile components such as gasoline, building materials and auto dealers, contracted by 0.3% month-over-month versus expectations for a 0.4% gain.* In addition, March headline retail sales were revised lower from a 0.7% month-over-month gain to a 0.6% gain.* We'd view the April retail sales data as a sign that consumers are showing fatigue, but we don't believe they are fully exhausted. Labour-market conditions are easing but remain strong by historical standards, which should provide support to consumer spending. Our view is that consumer demand will moderate compared with 2023 but should remain in positive territory, supporting ongoing U.S. economic growth this year.
Brock Weimer, CFA
Associate Analyst
*FactSet
- Stocks close mostly higher with U.S. inflation in focus: The TSX closed modestly lower while U.S. stocks finished mostly higher, as markets digested the most recent batch of U.S. inflation data. The TSX posted a 0.1% decline, while the S&P 500 rose by 0.5%.* U.S. small-cap stocks outperformed today, with the Russell 2000 closing higher by over 1%. U.S. small-caps have gained more than 6% since mid-April, reflecting renewed risk appetite from investors, which has been driven by a pullback in bond yields. On the inflation front, U.S. producer price index (PPI) inflation was higher than expected for April; however, much of the upside surprise was driven by downward revisions to the March data. Accordingly, markets mostly overlooked the upside inflation surprise, with stocks mostly higher and bond yields moving lower. At a sector level, leadership favoured growth sectors of the S&P 500, with information technology and communication services among the top performers.* European markets were mixed following an upbeat reading on German economic sentiment, which rose to its highest since 2022. Inflation will remain center stage for markets with the release of U.S. consumer price index (CPI) inflation tomorrow.
- U.S. inflation higher than expected: Headline PPI for April was higher than expected, rising by 0.5% month-over-month versus consensus expectations for a 0.3% gain.* Core PPI, which excludes the volatile food and energy components, surprised to the upside as well, rising by 0.5% month-over-month versus expectations for a 0.2% gain.* However, the upside surprise in PPI was in large part due to downward revisions to the March data. Both headline and core PPI were revised from a 0.2% month-over-month increase to a -0.1% month-over-month decline for March. On a year-over-year basis, headline PPI rose by 2.2% in April, slightly below expectations, while core PPI gained 2.4%, slightly above expectations. With the upside surprise in the month-over-month change largely driven by prior revisions, we'd view today's inflation reading as better than the headlines suggest. Our view remains that inflation will trend lower in the months ahead, albeit not without bumps along the way. Inflation will remain in focus with the release of U.S. consumer price index (CPI) inflation tomorrow, where expectations are for headline CPI to rise by 3.4% year-over-year.*
- Strong U.S. corporate earnings have supported equity markets: Strong corporate profit growth in the U.S. has played a key role in the strength in equity markets in recent weeks. Over 90% of companies in the S&P 500 have reported first-quarter earnings, and roughly 80% have exceeded expectations, with earnings on pace to grow by over 5% year-over-year.* At a sector level, information technology, consumer discretionary and communication services continue to stand out, with each sector on pace to grow earnings by over 20% in the first quarter.* Defensive sectors, such as utilities and consumer staples, along with financials, have seen strong profit growth as well. Looking ahead to the full year, expectations are for the S&P 500 to grow earnings by nearly 11% year-over-year. On the domestic front, corporate earnings have been less favourable in the first quarter. With roughly 80% of companies in the TSX having reported results, earnings are on pace for a -0.3% year-over-year decline, with just over 50% of companies in the index reporting a positive earnings surprise. For the full year, expectations are for the TSX to grow earnings by roughly 4%.* 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. We believe opportunities are more attractive in U.S. equity markets, and we recommend investors underweight Canadian large-cap stocks in favour of U.S. large-cap stocks as appropriate with their financial goals.
Brock Weimer, CFA
Associate Analyst
*FactSet