- 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
Monday, 5/13/2024 p.m.
- Stocks steady to start the week – After gaining a little shy of 2% last week, the TSX closed modestly lower on Monday while the S&P 500 finished essentially unchanged, the Nasdaq was higher, and the Dow shed 81 points. Global markets were little changed while commodities were mixed, with oil edging higher and gold down. Bond markets were quiet as well, with the 10-year yield just below 3.7%. Technology was the standout leader today, while most other sectors traded in a fairly narrow range amid a lack of major data or headlines. We'd chalk up Monday's muted move to markets being in wait-and-see mode ahead of the pivotal U.S. inflation report due out later this week. *
- Attention on inflation – The headliner for the week is undoubtedly the April U.S. consumer price index (CPI) report set to be released on Wednesday. Consensus expectations are looking for a 0.3% month-over-month increase in core CPI, following a string of hotter-than-anticipated 0.4% monthly increases to start the year. The moderation in the pace of inflation would be a welcome sign and one that we believe will be necessary to validate the rally in stocks and decline in yields so far in May. We'll be watching services and shelter prices in particular, as moderation in these categories has been stubbornly slow and will be required for a broader move lower in consumer prices as we move through the remainder of the year. We don't expect the downtrend to be steady, but persistent signs of disinflation over the next several months would, in our view, support the case for the Fed to squeeze an initial rate cut in before the year is over. Regardless of the exact timing, we continue to believe the Fed's next move will be a cut, which is a broadly favourable backdrop for the economy and financial markets. Meanwhile, more moderate domestic inflation readings in recent months support our view that the Bank of Canada will have the opportunity to cut rates sooner this year.
- A fresh look at the consumer – It's a quiet week for domestic calendar, but in addition to the consumer price data, a round of additional upcoming reports will provide a fresh read on the state of the U.S. consumer. Persistent inflation in recent months, accompanied by a softer headline first-quarter GDP figure, spurred talk of potential stagflation, a condition in which the economy is weak at the same time that inflation is elevated. We think talk of stagflation is premature at this stage. Importantly, while the U.S. economy is likely to soften a bit from last year's strong pace, consumer spending (the lion's share of GDP) is poised to hold up reasonably well on the back of historically low unemployment and still-strong wage gains. The latest reads on April U.S. retail sales, along with quarterly earnings announcements from Home Depot, Target and Walmart, will offer investors a fresh look at household spending trends that will help round out the outlook for the economy. Announcements from other consumer companies in recent weeks has signaled some consumer fatigue. We think a slowdown in household spending is likely to unfold as we advance, but we think this will take the form of slightly slower growth, not a collapse in spending. This, along with signs of rebounding activity in other areas like manufacturing and capital investment, will, in our view, continue to power positive economic growth this year.
Craig Fehr, CFA
Investment Strategy
*FactSet