Earnings were in the spotlight last week, and reports have largely been viewed favorably mid way through earnings season. Both the number and magnitude of positive earnings surprises are running ahead of their 10-year averages, as 79% of S&P 500 companies that have reported Q1 results have beaten earnings estimates. This strength, particularly from giant tech companies, pushed the S&P 500 to a solid weekly gain after a rocky start, which included the first one-day decline of over 1% in 22 trading days.
Looking ahead to second quarter results, analysts have cut earnings estimates by less than average. This comes as the economy grew less than expected in the first quarter, though GDP growth remained positive. Treasury yields dropped at longer maturities, but trepidation around the debt ceiling stalemate has caused a mismatch at the front end of the yield curve. While 3- and 6-month Treasury yields remain elevated, 1-month yields plunged in April, though some of these gains were given back late last week.
Following Friday’s Personal Consumption Expenditure (PCE) print that showed inflation continues to moderate, the Federal Reserve (Fed) will release their policy rate decision this week. Futures markets are pricing in a roughly 90% chance of a 0.25% hike before a likely pause in June. Investors will keep a close eye on Chairman Powell’s comments following the rate decision before turning to key labor data set to be released on Friday.
A look back
- U.S. equities outperformed last week, with the S&P 500 up 0.9%. Emerging markets lagged for a second-straight week.
- Treasury yields fell at maturities longer than 1 year, with the 10-year falling back beneath 3.50%. The 3-month/10-year inversion deepened and is now below -1.65%.
- U.S. GDP growth remained positive in the first quarter but slowed significantly relative to the fourth quarter of 2022 and missed consensus expectations.
A look ahead
- The Fed will announce their policy rate decision on Wednesday. Markets are expecting one final 25 basis point hike, but a pause is also on the table.
- Earnings remain in focus with roughly a third of S&P 500 companies set to report Q1 results. Health care and utilities, two underperforming sectors year to date, will be in the limelight.
- Economic releases: ISM & S&P Global U.S. Manufacturing & Services, FOMC rate decision, and the Unemployment Rate.
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