April 2024 Review and Outlook

Executive summary:

• Stocks declined for the first month since October as bond yields moved higher
• Economic data reflects stubborn inflation
• Corporate earnings starting off relatively stronger than expected
• Gold continues to outperform along with broader commodities
• Geopolitical tensions remained elevated 

Outside of commodities, there really wasn’t anywhere to hide in the market to start out the second quarter as rising inflation and higher-for-longer narratives took hold. There was a significant shift in market sentiment regarding the Federal Reserve’s potential actions as the probability and magnitude of rate cuts decreased. During the final quarter of 2023 and early 2024, there was strong confidence in the possibility of at least three rate cuts starting in June 2024, but we have quickly changed to expectations of one 25 basis point cut (if any) by year-end. Despite ongoing messages from the Fed advocating patience and waiting for clearer signs of disinflation, several hawkish speakers and economic indicators highlighting persistent inflation raised doubts about the timing of any rate cuts.

Economic data, particularly concerning inflation and overall economic performance, were the focus of the market in April. March’s Consumer Price Index (CPI) and Producer Price Index (PPI) data released in April came in hotter than anticipated, particularly in sectors like shelter and services. Although March’s Personal Consumption Expenditure (PCE) was in line with expectations, it was still viewed as too high for the Fed to consider easing monetary policy. Additionally, while March’s nonfarm payrolls and retail sales exceeded forecasts, the first-quarter Gross Domestic Product (GDP) growth was lower than projected. This combination of stubborn inflation and some weaknesses in economic growth led to discussions of “stagflation,” although we will have to wait and see if that plays out. 

Despite these concerns, there were some positive factors in play as we closed out the month. Corporate earnings for the first quarter generally exceeded expectations, with a higher-than-expected growth rate compared to forecasts. Large tech stocks also reported strong earnings, indicating that the secular growth theme in AI remains intact. Furthermore, the sharp pullback in April led to oversold conditions in the market, with less than 30% of S&P 500 constituents trading above their 50-day moving average, down from 92% in Q1. Additionally, geopolitical tensions eased somewhat despite initial concerns about a potential conflict in the Middle East.

There are still concerns about the Fed’s ability to reduce inflation to its target of 2% and the timing of any potential rate cuts. Survey data indicated areas of economic weakness, such as a decline in new orders in April’s PMI and deteriorating regional manufacturing reports from multiple Federal Reserve districts. Market sentiment has become more cautious, and companies continue to report rising caution among their customers. Despite the easing seen in April, the S&P remains significantly higher than its lows in October 2023.

Headline Inflation YoY:

Core Inflation YoY:

Supercore Inflation YoY:

Government Debt:

Rates:

Yield Curve:

UST 2YR Yield:

UST 10YR Yield:

Fed Funds Futures Curve:

Gold:

Gold is breaking out to new all-time highs but not yet seeing “confirmation” from two relative strength ratios. Brian Joyce from Nasdaq’s Market Intelligence Desk covered this in an article published earlier this month titled Gold’s Silver Lining Has a Touch of Grey (Grateful Dead reference in the title and throughout the article).  The article warns of two ratios not yet confirming gold’s bullish breakout but has a glass-half-full tone and concludes, “Time will tell how the precious metals cycle unfolds from here, but its recent strength may suggest the dawn is breaking.” 

Earnings: 

With just over 50% of S&P 500 companies reporting Q1 earnings, the results have been relatively positive. To date, 54% of companies have reported a beat on revenues, with 30% missing estimates and 16% matching. The average beat was just under 1.3%. EPS reports, on the other hand, saw companies beating nearly 81% of the time, above the 5-year average of 77% and the 10-year average of 74%. Financials stocks reported the largest top-line upside with an average beat of ~2.6%, followed by Energy and Health Care with 2.4%. Communications stocks saw the largest upside surprise in terms of EPS, with an average surprise of 13.5%, followed by Industrials with 10.4%. In aggregate, the 8.7% earnings above estimates are above the 5-year average of 8.5% and the 10-year average of 6.7%.

On the growth front, the outlook was not as upbeat as the 1Q reports. Presently 62% of companies have reported revenue growth, with 34% declining, and 4% flat, with an average growth rate of 3.6%. Utilities companies took the biggest hit with only 20% reporting growth, with an average decline of 8.3%. Contrarily, Communications led the sales growth story with an average print of 8.3%.  

Earnings growth has been a bit better, with 67% reporting growth, 33% cutting, and less than 1% in line, with an average EPS growth rate of 3.6%. If the actual growth rate remains where it stands, it will mark the third straight quarter of YoY earnings growth. Health Care and Energy saw the largest declines at 31.4% and 29.3% respectively, followed by Materials 11.0%. On the positive side, Communications also led the way with 42.2% earnings growth, followed by Technology 24.3%, Utilities 11.8%, and Real Estate 22.3%. The remaining sectors each rose between 1-6%.

In terms of 2-day price action following earnings prints, Consumer Staples saw the largest gains with an average jump of 0.9%, followed by Consumer Discretionary at 0.7%, Utilities at 0.5%, and Health Care at 0.3%. Industrials were flat, while all other sectors saw 2-day declines after reporting. Communications stocks were hit the hardest at -2.4%, followed by Utilities at -0.9%. The remaining sectors each fell between 0.1-0.6%. 

The forward 12-month PE for the S&P 500 is 20.0, which is above the five-year average (19.1) and the 10-year average (17.8), according to FactSet. 

Looking Ahead:

The month of May kicks off with a Federal Reserve meeting on the 1st, at which the board is expected to keep interest rates steady at 5.25%. We also continue to have pivotal economic data throughout the month, starting with the jobs numbers and the crucial CPI report on the 15th. Outside of the macro lens, May will also see the announcement of the Preliminary Additions and Deletions list for the FTSE Russell US indices on May 24.

The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.