Strong Earnings and Inflation-friendly Data Boost Markets

After a lackluster start, equity and fixed income indices ended the week in positive territory following a better-than-expected tone in comments from Federal Reserve Chairman Powell and strong earnings from corporate bellwethers. For the week, the NASDAQ rose 1.44%, the Dow Jones Industrial Average was higher by 1.14% while the S&P 500 index trailed, advancing by 0.56%.¹ In fixed income markets, the Bloomberg US Aggregate Bond rose 1.17% as the US Treasury 10-year bond ended the week at 4.50%, down 17bps.²

On Wednesday, Fed Chairman Powell announced that the FOMC had chosen to hold the federal funds rate steady at 5.25% – 5.50%, a level it has maintained since July 2023. His comments were viewed as less hawkish than anticipated, given that in recent weeks weak economic data – including a lower-than-anticipated 1Q GDP reading of 1.6% and a higher-than-expected PCE Price Index, a key inflation variable – had negatively affected investor sentiment. With its decision to hold the line on rates, the FOMC in its post-meeting statement noted a “lack of further progress” in getting inflation back down to its 2% target.³ However, Powell also stated in his press conference that a rate hike was not likely.

Q1/24 corporate earnings remained in focus last week as reports from Amazon, Amgen and Apple drove equity markets higher. Conversely, weak reports from Starbucks and McDonald’s raised concerns over slowing discretionary consumer spending.

Amazon reported better-than-expected earnings and revenue for Q1, driven by growth in advertising and cloud computing.⁴ Amgen shares rose after the biotech firm posted an earnings and revenue beat. The company also announced it would proceed with its injectable obesity drug into a phase three trial. Apple rose after the tech giant announced a $110 billion stock buyback and reported revenues and earnings that topped analysts’ estimates.⁵

Meanwhile, Starbucks reported weaker-than-expected quarterly earnings and revenue, fueled by a surprise decline in same-store sales.⁶ McDonald’s missed quarterly profit estimates for the first time in two years as budget-conscious US consumers looked past its offers, and the Middle East conflict weighed on the burger chain’s international sales.⁷

With 80% of S&P 500 companies having reported results so far, 77% have reported a positive EPS surprise and 61% have reported a positive revenue surprise. For Q1/24, the blended (year-over-year) earnings growth rate for the S&P 500 is 5%. If 5% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2/22 (5.8%).⁸

On Friday, the Labor Department’s Bureau of Labor Statistics reported that non-farm payrolls rose 175,000 in April, well below the 240,000 jobs expected by economists surveyed by Dow Jones. The unemployment rate ticked higher to 3.9%, up from 3.8% in March. The report also indicated that average hourly earnings rose 0.2% from the prior month and 3.9% from a year ago, both figures below consensus estimates.⁹ Financial markets responded positively to these data points, which showed encouraging signs for inflation.

Sources:

1. Morningstar Direct
2. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024
3. https://www.cnbc.com/2024/05/01/fed-rate-decision-may-2024-.html
4. https://www.cnbc.com/2024/04/30/amazon-amzn-q1-earnings-report-2024.html
5. https://www.cnbc.com/2024/05/03/stocks-making-the-biggest-moves-premarket-aapl-amgn-net.html
6. https://www.cnbc.com/2024/04/30/starbucks-sbux-earnings-q2-2024.html
7. https://www.reuters.com/business/retail-consumer/mcdonalds-sales-misses-estimates-customers-cut-back-spending-2024-04-30/
8. https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_050324.pdf
9. https://www.bls.gov/news.release/empsit.nr0.htm