Stock markets enjoyed a boost last week, fueled by a combination of better-than-expected earnings reports from tech giants Amazon (AMZN) and Apple (AAPL), along with a dip in bond yields. This uplift in equities marks a continuation of positive momentum initiated by strong performances from Alphabet (GOOGL) and Microsoft (MSFT) the week prior. The S&P 500 saw an uptick of 0.55%, closing at 5,127.79, while the Dow Jones Industrial Average increased by 1.14% to 38,675.68, and the tech-centric Nasdaq Composite climbed 1.43%, ending at 16,156.90.
This recent rally contrasts sharply with the market situation in mid-April when stocks took a hit due to high inflation numbers that adversely affected bond yields, putting investors on edge. Additionally, earnings setbacks from Netflix (NFLX) and Meta Platforms (META) further dampened market sentiment. Despite these challenges, the overall earnings season has outperformed expectations. According to FactSet Vice President John Butters, a significant number of S&P 500 companies have not only surpassed earnings forecasts but have done so with a notable margin, leading to the highest year-over-year earnings growth rate since the second quarter of 2022.
The gains in stock prices have been remarkable in 2024, with the S&P 500 and the Nasdaq up 7.50% and 7.63% year-to-date (YTD), respectively. This improvement has occurred despite the rising Treasury bond yields, which escalated from approximately 4% at the start of the year to 4.60% last week, making bonds a more attractive investment compared to stocks.
As we near the end of the earnings season, the ongoing rally’s durability will likely hinge on the broader economic narrative shaped by Wall Street. This year, the economic discussion has oscillated between concerns of stagflation—a mix of sluggish growth and increasing inflation—and hopes for a ‘soft landing,’ characterized by moderate growth and easing inflation. Recent government data underscored a stagflation scenario with a report indicating a lower-than-expected GDP growth of 1.6% in Q1 2024, compounded by a rise in the PCE price index to 3.4%.
However, last week’s shift towards a soft-landing outlook followed the release of new labor market data, including the business payroll and household reports. These indicated a cooling in the labor market, with a slowdown in job growth and an increase in unemployment, alongside a deceleration in wage growth—factors contributing to declining inflation pressures.
The preferable macroeconomic scenario for equity markets, the soft landing suggests manageable growth that supports steady corporate earnings while moderating inflation aids in keeping interest rates low, thereby enhancing stock valuations. This scenario was bolstered by positive earnings results from Apple, which contributed to the market’s gains at the week’s close.
Looking ahead, it remains uncertain which economic conditions will dominate as the narrative could shift quickly, affecting investor sentiment and market volatility. Despite the optimistic end to last week, investors should prepare for fluctuations as Wall Street navigates through varying economic signals until the next earnings season unfolds.
In conclusion, while the recent stock market rally offers a glimpse of investor confidence and resilient corporate performance, the continuation of this trend depends heavily on economic indicators and market sentiment. Investors would be wise to stay informed and flexible, ready to adapt to the evolving economic landscape.