Drivers of market movement
The equity market is on pace for a modest gain in a volatile week. Investor wariness surrounding corporate earnings and monetary policy was more than offset by a strong relief rally on Thursday and Friday. The week’s market movements were a blend of optimism driven by solid earnings, caution due to the FOMC’s stance on interest rates, and attentiveness to economic indicators that signal the health of the broader economy. Earnings news was dominated by the Magnificent 7, with better-than-expected results fueling investor optimism. The S&P 500® Index touched its best level in mid-April, but remains in a period of sideways volatility, unchanged since early March. April snapped a five-month winning streak with a 4% loss, though the year-to-date gain is nearly 8% following this week’s 1% gain.
Bond market activity continues to show levels of volatility normally reserved for equities, influenced by a mix of economic data and policy decisions, driving the MOVE Index back above 100 after a short period of relative calm. The U.S. Treasury’s sale of $112 billion in new notes and bonds, the largest in two years, has been a key driver, signaling a robust supply that could potentially weigh on prices. The nearly 1% surge in the 10-year Treasury yield between early January and late April drove cautious positioning for institutional investors, moreover, Bank of America noted that bond shorts are at the highest level since the beginning of 2022. That said, the yield has seen a notable decline since.
Job gains slowed in April, with nonfarm payroll growth of 175,000 versus an estimate of 240,000 and 315,000 in March. This is the slowest growth in six months and breaks a string of better-than-expected reports, but equity and bond investors reacted positively because of the perceived impact on the Fed. Growth was strongest in health care, transportation, and retail, while leisure and hospitality, construction, and government slowed. The unemployment rate ticked higher to 3.9%, touching the highest level since January 2022. Wage growth slowed to just 3.9% from a year ago, the slowest pace since June 2021, despite California’s implementation of a $20 minimum wage for fast-food workers on April 1. The labor force participation rate was steady at 62.7%, though the rate for those aged 25-54 touched the highest level in 20 years at 83.5%.
The FOMC meeting concluded with rates held steady, continuing the trend of maintaining the benchmark interest rate at a 23-year high. The decision was influenced by persistent inflation concerns, with the committee suggesting a possible stall in achieving a balanced economy. This outcome was anticipated by the market, which had priced in the high likelihood of steady rates. Fed Chair Jerome Powell stated, "There are paths to cutting and there are paths to not cutting, it is really going to depend on the data, but also said it is "unlikely the next policy rate move will be a hike" during his press conference, calming investor fears. Investors focused on the slowing of quantitative tightening beginning in June, slowing the pace of Treasury bond runoff from $60 billion to $25 billion per month. In reaction to the news, investors modestly adjusted expectations for rate cuts this year, up to more than two from just over one a week ago.
Earnings season is coming in modestly better than expected, with nearly 80% of the S&P 500 companies having reported. Earnings growth is trending towards 5% (the third straight quarter of growth), better than the 3% expected at the beginning of the quarter, while sales growth has been 4%, versus the 3% expected coming into the quarter. Nearly 80% of companies are beating their estimates, by an average of nearly 10%. The strongest growth has been seen in communication services (led by Alphabet and Meta), consumer discretionary (Amazon), and technology (Nvidia), while energy (Exxon), health care (Bristol-Myers and Pfizer), and materials all saw declines of more than 20%. Estimates for the full year remain steady, with expected growth of 11% on sales growth of 5%. Management commentaries have focused on digital transformation and efficiency, the impact of global economic uncertainties, and a cautious but optimistic outlook for consumer spending and business investment.
Details on performance
Equity markets rose for the second week, with investors reacting positively to the Fed meeting, earnings, and macro data. The S&P 500 Index gained less than 1%, while the Dow and NASDAQ each added more than 1%. Growth indexes beat value, while small caps beat large caps. Leading sectors for the week included utilities, real estate, and consumer discretionary, while energy, financials, and industrials lagged. Volatility fell sharply, with the VIX again below 14, while trading volume was elevated.
Global markets continued their strong relative performance to domestic markets, with the MSCI EAFE® Index and MSCI Emerging Markets® Index both outperforming the S&P 500 this week and over the past month. Asian markets were strong on the risk-on shift, with Hong Kong up 6%, China up 5%, and Japan up 3%. European markets were mixed on encouraging earnings and mixed macro data, with the UK up 1%, Germany and France relatively flat, and Italy and Spain down 1%. Latin America was also mixed, with Brazil up 2% and Mexico down 1%. The trade-weighted dollar index was lower by 1%, driven by a 5% jump in the yen from a 34-year low.
Interest rates eased this week following a dovish interpretation of the FOMC meeting and a "Goldilocks" payroll report, with the 10-year Treasury yield down 0.17% to 4.50%. The 2-year yield dropped 0.19% to 4.80% after briefly breaching 5%, resulting in a modest flattening of the yield curve. Credit spreads remained tight. Commodity prices fell sharply this week, with the S&P Goldman Sachs Commodity Index falling 4%. Crude prices saw their sharpest weekly drop in three months on demand concerns and discussion of a ceasefire between Israel and Hamas. OPEC+ is expected to extend the recent output cut following the June 1 meeting. Agricultural commodities were mixed.
Investors have recommitted to the equity market following a brief pause, with $10 billion of inflows into global equity funds last week, $14 billion into ETFs, and $4 billion out of mutual funds. Bond funds saw inflows for the 19th straight week, adding $5 billion, driven by investment grade. Money markets continued to experience outflows, losing $2 billion. Investor sentiment has been relatively steady, with the CNN Fear & Greed Index down modestly to 40 from 42 last week, driven by deteriorating market breadth. The AAII Sentiment Survey say the percentage of bulls jump to 39% from 32% last week, with bears down modestly to 33% from 34%.
What to watch
A relatively light week of data awaits as earnings season slows. Economic releases include consumer credit on Tuesday and consumer sentiment on Friday.