A strong earnings season and blockbuster reports from tech industry titans have propelled the U.S. stock market to rebound from its first significant swoon of 2024. Next week’s inflation data could determine whether the rally will continue or falter. The S&P 500 (SPY) index is up over 9% for the year, nearing its late-March record high after a 5% pullback last month.
The bounce aligns with a stronger-than-expected first-quarter reporting season for U.S. companies. With over 80% of the S&P 500 companies having reported results, earnings are on track to increase by 7.8%, surpassing the April forecast of 5.1% growth, according to LSEG IBES. However, investors remain cautious that the rally could stall without clear signs of cooling inflation. Federal Reserve Chairman Jerome Powell reassured markets that interest rate hikes are unlikely anytime soon, but months of stubbornly high inflation have raised concerns that policymakers may not cut rates this year.
Market Overview:
-U.S. stocks rebounded significantly after an earlier pullback in 2024, fueled by a strong earnings season.
Strong Performance:
-S&P 500 currently up over 9% year-to-date, recovering from an earlier decline.
-Companies exceeding earnings expectations, with overall earnings on track to increase by 7.8%, surpassing initial forecasts.
Earnings Driver:
-Over 80% of S&P 500 companies reported earnings that beat forecasts.
Key Points:
Bullish Market:
-Strong earnings season propels U.S. stocks higher.
-S&P 500 up over 9% year-to-date, exceeding expectations.
Earnings Beat:
-Over 80% of S&P 500 companies report earnings that beat forecasts.
Earnings Growth:
-Overall earnings on track for a 7.8% increase, surpassing initial estimates of 5.1%.
Lingering Concern:
-Inflation remains a major concern for investors despite positive earnings.
Looking Ahead:
Inflation Data Test:
-Release of the Consumer Price Index (CPI) report on May 15th is critical.
-A hotter-than-expected reading could disrupt the recent rally and reignite fears of interest rate hikes.
-Investors will be closely watching this data point to gauge the Fed's monetary policy trajectory.
Beyond Earnings:
-Retail sales data will offer insights into consumer spending and economic health.
-Earnings reports from key companies like Walmart (WMT), Home Depot (HD), and Cisco (CSCO) will provide further clues on corporate performance.
Tech Sector Watch:
-The "Magnificent Seven" tech giants continued their dominance during the earnings season.
-Alphabet (GOOGL) announced its first-ever dividend.
-Apple (AAPL) unveiled a record-breaking stock buyback plan.
-The performance of the tech sector will be closely monitored, particularly Nvidia's (NVDA) upcoming earnings report on May 22nd, to see if it can sustain its strong momentum.
-Investors remain cautious, punishing companies that fall short of expectations.
Earnings have “got investors feeling more comfortable about being in this market," said Art Hogan, chief market strategist at B Riley Wealth. However, "the trajectory of inflation is always going to be important to us while we're in a cycle where we expect the next thing for the Fed to do is to cut rates." Inflation reports have preceded market pivots in recent years, as the Fed increased interest rates to cool inflation from four-decade highs in 2022. Economists polled by Reuters expect the May 15 Consumer Price Index (CPI) report will show a 0.3% increase in April from the previous month.
Bullish investors have gained confidence from a solid earnings season. Standouts include Alphabet (GOOG), which announced its first dividend as it topped sales and profit estimates, and Apple, whose revenue decline was less than feared as it unveiled a $110 billion stock buyback plan. Among the Magnificent Seven tech giants, Nvidia is set to report on May 22, with the group's quarterly earnings expected to jump 49.4%. Analysts are increasingly upbeat about megacap financial prospects, with estimates for 2024 earnings of six reported megacap companies rising by an average of 2.1% in the past 30 days, compared to a 0.1% increase for the S&P 500 overall.
