Market Pulse

Authored by Jeremy Robert

Following a tough end to 2024, markets rebounded in January, with broad gains across asset classes and regions. January was a busy month as the Federal Reserve put rate cuts on pause, a Chinese-created AI model triggered a sell-off in AI related stocks and President Trump imposed tariffs. However, optimistic investors focused on deregulation, and the potential for lower taxes drove stocks higher. Although we saw wider participation in the market stall last month, the softness in mega-cap technology stocks resulted in the equally weighted S&P 500 rising 3.4%, outperforming the market-cap weighted S&P 500, up only 2.7%. Small-cap stocks represented by the Russell 2000 were up 2.5% for the month as yields moved modestly lower. Developed international stocks (MSCI EAFE) gained 4.8% as President Trump focused his tariffs on Canada, Mexico and China. Despite this rhetoric, emerging markets (MSCI EM) were up 2.2%. Fixed income investors received some relief as yield moved slightly lower during the month, causing the U.S. Aggregate Bond Index to rise a modest 0.52%.

The Consumer Price Index (CPI) rose by 0.4% for the month, putting the 12-month inflation rate at 2.9%, which was in line with expectations. The rise in prices for December was largely due to a gain in energy prices, higher by 2.6% for the month, and responsible for 40% of the CPI index’s gain. Core CPI, which strips out volatile food and energy, was 3.2% on an annual basis, slightly better than the forecast for 3.3% after a rise in core CPI of 0.2% for the month. Shelter saw slowing increases in prices, rising by only 0.3% in December and 4.6% from a year ago, which was the smallest one-year gain since January of 2022. Many economists had warned that the real time data for shelter was lower than the lagged data the CPI index tracks. There has been meaningful progress on inflation, but the Fed continues to forecast a slower rate cut cycle, given that labor market and economic data continue to show signs of strength. The Fed now awaits the new administration’s policies, including the impact that potential tariffs and immigration reform will have on key economic metrics.

Earnings season is underway, with 36% of S&P 500 companies having reported actual results. Results have been strong thus far as 77% of those S&P 500 companies reported a positive earnings per share (EPS) surprise, and 63% of companies reported a positive economic surprise, according to FactSet. The Q4 2024 blended earnings growth rate for the S&P 500 is 13.2%, which would mark the highest year-over-year growth rate reported since Q4 2021, showing that corporations continue to deliver strong results. Earnings expectations are elevated, with analysts now projecting a 14.3% growth rate for 2025 and 13.7% in 2026. The market will continue to focus on mega-cap technology company earnings; however, with the market showing signs of broadening out, investors will be closely watching earnings results for the 493 companies outside the magnificent seven. Valuation on the S&P 500 remains rich relative to history with the forward 12-month P/E at 22, higher than the five-year average of 19.8, and the 10-year average of 18.2.

January provided us with a glimpse of the heightened volatility this new administration and their bold ideas will bring for the coming years. The economic data continues to show strength, and so far, corporations have been able to deliver strong results. The strong momentum behind the AI technology theme temporarily halted on the announcement of DeepSeek, a Chinese AI model claiming to have been developed with far less capital. Though we have doubts about the cost and details, it is important to recognize how rapidly dynamics can change with such innovative technology. Investors will likely have many reasons to sell based on headlines this year, but staying invested and being diversified is generally more successful than trying to time the market.

Source: Earnings Insight, FactSet, Jan. 31, 2025

Authored by Jeremy Robert

Markets stalled in December as investors struggled to digest conflicting information. On one hand, the economy and labor markets continued to show resilience. On the other hand, fears of sticky inflation and concerns over the new administration’s potential policies dampened forward expectations. Furthermore, the Federal Reserve cut the fed funds rate by 25bps and recalibrated the prospect for rate cuts in 2025 from four cuts to only two. This hawkish message from the Fed caused the yield on the 10-year treasury to rise more than 40bps for the month. With interest rates moving higher, fixed income investors saw price declines as reflected in the Bloomberg U.S. Aggregate Bond Index, finishing 2.2% lower for the month. Against this backdrop, investors gravitated back towards mega-cap technology stocks causing the Nasdaq to rise 0.6%, while the S&P 500 fell 2.4%. Small-cap stocks were hit the hardest, tumbling 8.3% for the month. After posting healthy returns for much of the year, large-cap value stocks, as represented by the Russell 1000 Value, fell by 6.9%.

Inflation continues to be a concern for Wall Street, as consumer prices increased at a faster annual pace in November. The Consumer Price Index (CPI) rose by 0.3% for the month of November, bringing the annual inflation rate to 2.7%, according to the Bureau of Statistics. The annual rate was 0.1% higher than in October. Shelter costs rose by 0.3% in November, accounting for nearly 40% of the monthly increase in CPI and rising 4.7% on a year-over-year basis. We continue to see strong progress on inflation, especially the continued deflation of core goods prices and a slowing pace of core services prices. However, inflation remains above the Federal Reserve’s inflation target of 2%. The Fed delivered a 25bps cut in December, but signaled they would remain data dependent and suggested a slower pace of rate cuts for 2025. The market reacted negatively to the hawkish message from the Fed and continued to re-adjust expectations for rate cuts throughout the month of December.

Q4 earnings season is quickly approaching, and investors are eager to know whether businesses are seeing any signs of a pullback by the consumer or a slowdown in CapEx spending, both of which were tailwinds for corporate earnings in 2024. Expectations are high for Q4 2024, with the estimated year-over-year earnings growth rate for the S&P 500 at 11.9%, which would mark the highest growth rate for the S&P 500 since Q4 2021 according to FactSet. On September 30, 2024, analysts anticipated the growth rate to be 14.5%, so expectations have been lowered over the past few months. Corporate executives have been cautious when issuing guidance, with 71 S&P 500 companies having issued negative earnings per share (EPS) guidance, versus 35 S&P 500 companies that have issued positive EPS guidance. The bar remains high for the technology sector, and if we begin to see earnings growth accelerate outside of technology, it could be a catalyst for the market performance to broaden beyond technology. The forward price earnings ratio (P/E) for the S&P 500 is 21.4, which is above the five-year average of 19.7 and the 10-year average of 18.1.

Unfortunately, the market did not end the year on a high note, but it is important to remember how far we have come. The S&P 500 has posted 20+% returns in back-to-back years with relatively low volatility, during a time when many predicted the U.S. economy would be in a recession. We acknowledge that a large portion of those returns were generated by a handful of stocks, but we see this as an opportunity for the rest of the market to perform. We remain mindful that the market is constantly trying to predict the future, which often results in overreactions on both the upside and downside. The data continues to show a strong economy, supported by healthy corporations delivering strong earnings. Furthermore, higher yields now present an attractive alternative for investors looking for income generation. Looking ahead, we expect volatility to increase as the Trump administration begins to roll out their agenda. Therefore, investors should take the time to rebalance their portfolios to ensure they are comfortable with their exposure across asset classes, regions and sectors.

Source: Earnings Insight, FactSet, Jan. 3, 2025

Authored by Jeremy Robert

U.S. stocks surged on expectations of deregulation and a pro-business agenda following the U.S. presidential election. Economic data continued to show strength supported by a resilient labor market, Gross Domestic Product (GDP) growth and the Fed rate-cutting cycle. Small cap stocks (Russell 2000 Index) were the biggest beneficiary of a Trump election, delivering an 11% gain, outperforming the S&P 500 (5.9%) and the Nasdaq (6.3%). International stocks underperformed due to concerns regarding Trump’s tariff threats, driving international developed stocks (MSCI EAFE Index) lower by 0.6% while emerging markets (MSCI EM Index) were hit the hardest, down 3.6%. Fixed Income investors received relief as treasury rates declined by 10bps for the month, boosting the U.S. Aggregate Bond Index higher by 1.1%.

Earnings season has almost wrapped up with 95% of the S&P 500 companies having reported results. Companies continue to show strength, supported by strong consumer and enthusiastic CapEx spending. According to FactSet, 75% of the S&P 500 companies reported positive earnings per share (EPS) surprises, and 61% reported a positive revenue surprise in Q3 2024. The blended year-over-year earnings growth rate for the index is 5.8%, which would mark the fifth straight quarter of year-over-year earnings growth for the index. Analysts expect continued strength for Q4, expecting the estimated earnings growth rate for the S&P 500 to double to 12%. Earnings guidance from management teams have been cautious with 58 companies issuing negative EPS guidance, while 33 companies have issued positive EPS guidance. Valuations continue to be rich on a historical basis with the 12-month forward price earnings ratio (P/E) now at 22, higher than the five-year average of 19.6 and the 10-year average of 18.1.

The Consumer Price Index (CPI) rose by 0.2% in October, bringing the 12-month inflation rate to 2.6%. The Core CPI, which excludes food and energy, was up 0.3% for the month and 3.3% annually. Energy costs were flat in October after declining over the past several months, while the food index increased by 0.2% and was up 2.1% since this time last year. We continue to see inflation moderating closer to the Federal Reserve’s 2% target, but shelter prices continue to accelerate, increasing 0.4% in October, twice as much as September and up 4.9% on an annual basis. According to the Bureau of Labor Statistics, shelter was responsible for more than half of the increase in CPI for the month. The path to 2% continues to be a bumpy one and the Fed continues to emphasize that the data will determine their rate-cutting cycle. Furthermore, they will have to navigate the potential impact the new administration’s policies will have on their strategy.

Investors have a lot to be thankful for this year as the market continues to climb higher, and performance continues to broaden across sectors and industries. Valuations look expensive relative to history, and a strong emphasis will be placed on earnings over the coming quarters. The market has clearly celebrated a Trump victory and the “Trump trade” has delivered healthy returns. We expect the market to finish 2024 off strong as seasonality and optimism of Trump’s pro-business agenda provide a tailwind. However, we are reminded of the past Trump presidency where a tweet or interview could swing the market in either direction. In this environment we continue to believe diversification matters, especially with the potential for major changes to the investing landscape.

Source: Earnings Insight, FactSet, Nov. 22, 2024

Authored by Jeremy Robert

Markets pulled back in October, as bond yields rose unexpectedly after the Federal Reserve cut the federal funds rate by 0.50%, triggering losses for both equities and bonds. Further boosting bond yields was the continued strength in the labor market, better than expected consumer spending and continued steady economic growth. Inflation continued to be moderate, while volatility heightened ahead of the election in the United States. Against this backdrop, the S&P 500 declined by 1%, while the technology heavy Nasdaq index fell by 0.5%. Small cap U.S. stocks (Russell 2000) and international equities (MSCI EAFE) took the brunt of the selling pressure, with small cap stocks slipping 1.5% and developed international stocks falling by 5.4%. With interest rates higher, fixed income (U.S. Aggregate Bond Index) was down 2.5% for the month.

Though it has received less headlines, inflation continues to be a focus for investors. The Consumer Price Index (CPI) increased 0.2% in September and 2.4% on an annual basis, which was slightly higher than expected. The annual inflation rate reflected a continued path towards the Fed’s 2% target with the September CPI 0.1% lower than August, the lowest it has been since February 2021. According to the Bureau of Labor Statistics, more than three quarters of the increase resulted from 0.4% higher food prices and a 0.2% gain in shelter prices, which offset a 1.9% decrease in energy prices. The Federal Reserve lowered the fed funds rate by 0.50% in September, starting rate cutting cycles investors had been anticipating. Since the rate cut, the data has shown strength in both the labor market and economic growth, dampening expectations for a faster rate cutting cycle and pushing yields higher across the curve.

Earnings continue to reflect strong performance by corporate America. With 70% of S&P 500 companies having reported Q3 results, 70% reported positive earnings per share (EPS) surprises and 60% reported a positive revenue surprise, according to FactSet. For Q3 2024, the blended year-over-year earnings growth rate is 5.1%, which would mark the fifth consecutive quarter of year-over-year earnings growth for the index. The strong earnings season displays the agility of corporations amidst strong economic growth and a resilient consumer. However, companies have been lowering expectations, as 37 S&P 500 companies issued negative EPS guidance, while 18 issued positive EPS guidance. Investors are cautious about mega cap tech stock going into 2025 as the comps get tougher to beat and capital expenditures on AI continue to soar. Valuations continue to look rich, versus historical averages with the forward price earnings ratio (P/E) for the S&P 500 now 21.3, above the five-year average of 19.6 and the 10-year average of 18.1.

Investors are eager to put the election behind them, as many speculate to which asset classes and sectors would perform best under each candidate. The market prefers gridlock, which provides checks and balances to prevent either party from policies that would disrupt the market. Company fundamentals remain strong, and we continue to see market performance broaden out with favored mega-cap technology stocks lagging the rest of the market since mid-summer. We always remind investors that time in the market is more important than timing the market and that making portfolio decisions based on events such as the election can be risky.

Source: Earnings Insight, FactSet, November 1, 2024

Authored by Jeremy Robert

September has historically been a weak month for the markets, but following a difficult start to the month, equity investors were rewarded for staying invested after the Federal Reserve cut interest rates by 50 bps. Economic data showed the U.S. economy was growing above trend, while the labor market showed signs of weakness during the month of September. Enthusiasm around easing monetary conditions sent the S&P 500 up 2%, while the technology heavy Nasdaq advanced 2.8%. Mid cap stocks were up 2.6%, while small cap stocks were the laggard in the domestic markets returning .71% for the month of September. International stocks were positive but mixed with the EAFE index delivering a return of .8% and the MSCI emerging markets index up rose 5.7% on the back of stimulus news out of China. Fixed income was also positive, up 1.3% as the market looked ahead to the Federal Reserve’s rate-cutting cycle.

The Consumer Price Index (CPI) increased by .2% for the month of August in line with expectations, bringing the 12-month inflation rate to 2.5%, which is the lowest level since February of 2021. However, the core CPI, which excludes volatile food and energy prices, rose by .3% in August, above the .2% estimate, while the 12-month core inflation rate was 3.2%. It is encouraging to see price levels continue to moderate towards the Federal Reserve’s 2% target, but the shelter component continues to prove challenging. Shelter, which represents 1/3 of the weight in the index, was up .5% in August and 5.2% since last this time last year. The rise in shelter housing costs accounted for roughly 70% of the increase in core CPI. Even with a disappointing core CPI report, the Federal Reserve lowered interest rates by 50 bps as they shifted their focus to labor market data that has begun to show signs of slowing. The market is now pricing 50 bps of cuts for the rest of 2024, while the Fed reiterated they remain data dependent.     

Earnings season is around the corner with the big banks kicking off Q3 2024 earnings the second week of October. According to FactSet, the estimated year-over-year earnings growth rate for the S&P 500 is 4.2%, which would mark the fifth straight year-over-year earnings growth for the index. Guidance continues to be mixed amongst S&P 500 companies, with 60 companies issuing negative EPS guidance, and 50 companies issuing positive EPS guidance. On June 30th the estimated year-over-year earnings growth rate for the index for Q3 2024 was 7.8%, but nine sectors are expected to report lower earnings than expected on June 30th due to downward revisions. Investors will be focused on the guidance from companies looking for clues as to whether the consumer is pulling back on spending due to persistent higher prices. The forward 12-month price earnings ratio (P/E) for the S&P now sits at 21, above the five-year average (19.5) and 10-year average (18.0).

The market narrative continues to change by the data point, as the economic data validates the bulls, while the slowing labor market provides the bears with some fuel. However, it seems we have avoided the recession that many have been calling for. The upcoming election in the United States is likely to cause some volatility in the markets, but the expectation of a divided government has caused the market to look beyond the election. While valuations in the U.S. look expensive relative to history, taking a deeper dive reveals there are many attractive areas of the market to take advantage of. Additionally, although the China stimulus announcement is big news, we caution investors from deploying long term capital into China as significant risk remains. There will be a lot of noise over the next few months and investors will be rewarded for maintaining a diversified portfolio and not trying to time the market or position based on election results.

Source: Earnings Insight, FactSet, October 4, 2024

Authored by Jeremy Robert

August was an eventful month for investors as a surprise interest rate hike by Japan, a weakening labor market and heightened geopolitical concerns caused volatility to spike and stocks prices to fall by 8.5%. However, the “dip” was bought with both hands by market participants as stocks quickly recovered and now sit just 1% below the all-time highs set in July. For the month of August, the S&P 500 posted a 2.3% gain, while the technology heavy Nasdaq rose 0.7%. Small cap stocks were down 1.7% for the month of August as investors found safety in large cap quality companies amidst heighted volatility. Yields continued to head lower with the expectation the Federal Reserve was close to cutting interest rates, and bonds represented by the U.S. Aggregate Bond index were up 1.5% for the month.

For the month of July, the Consumer Price Index (CPI) rose by 0.2%, as expected, after falling by 0.1% in June. Year-over-year, the CPI fell to 2.9% which was down 0.1% compared to June which is the smallest annual rise since March 2021. The rise in the CPI for the month of July was primarily driven by an increase in the shelter index of 0.4%, which was the main driver of the monthly CPI increase. Shelter remains the biggest hurdle for the CPI index to reach the Federal Reserve’s 2% inflation target. The food index increased by 2%, month-over-month, in July and 2.2% on an annual basis. The energy index was unchanged for the month following a 2% decline in June with gasoline prices down 2.2% year-over-year. At the Federal Open Market Committee (FOMC) meeting in July, the Federal Reserve maintained the overnight federal funds at the current range of 5.25%-5.50% but signaled the progress on inflation combined with weakening labor market data could allow them to begin cutting interest rates in September.

Earnings continue to be a bright spot this year with 93% of companies having reported actual results. Results were skewed to the upside with 79% of S&P 500 companies reporting a positive earnings per share (EPS) surprise and 60% of S&P 500 companies reporting a positive revenue surprise for Q2 2024. The blended year-over-year earnings growth rate for the S&P 500 is 10.9% according to FactSet, which would mark the highest year-over-year earnings growth rate since Q4 2021. However, earnings guidance has been mixed as many companies have done well improving margins by cutting costs but will also begin to feel the impact of a slowing consumer. For Q3 2024, 48 S&P 500 companies have issued negative EPS guidance, while 41 S&P 500 companies have issued positive EPS guidance. The market has recovered a large majority of the losses from the beginning of the month, bringing the 12-month forward P/E ratio for the S&P 500 to 21.0, higher than both the five-year average of 19.4 and 10-year average of 17.9.

We expect volatility to remain high going into the election season as September historically has been the weakest month for stocks going back to 1928, delivering an average monthly decline of 1.2%. Amidst the seasonal weakness and risks building in the economy, we emphasize diversification in portfolios and rebalancing to long term strategic allocations based on risk tolerance and time horizon. Fixed income can provide diversification and a ballast to the portfolio, especially with yields remaining attractive across the curve. Corrections are a component of a healthy market and happen much more often than investors remember. Knowing what you own and why you own it will help accomplish the key to investing “time in the market and not timing the market.”

Source: Earnings Insight, FactSet, Aug. 16, 2024

Authored by Jeremy Robert

Equity returns in July were mixed as investors digested economic data and political developments across the globe. Economic growth continued to surprise on the upside as consumers continued to spend, though at a slower pace. However, weaker than expected Consumer Price Index (CPI) and labor market data boosted market confidence that the Federal Reserve would cut interest rates soon. The market is pricing in a rate cut in September for a total of three interest rate cuts by year-end. Against this backdrop, investors began rotating into interest rate sensitive asset classes including small-cap stocks, which returned 10.2% in July. Conversely, technology stocks stumbled in July, pushing the Nasdaq lower by 0.7%, while the S&P 500 ended the month up 1.2%. Lower interest rates were a tailwind for bond investors with the U.S. Aggregate Bond Index returning 2.4% for the month.

Inflation data continued to show progress with the CPI reading, showing prices fell for the first time in more than four years. Specifically, the CPI declined 0.1% in June and 3% on an annual basis, which was below expectations for an increase of 0.1% and 3.1%, according to the Bureau of Labor Statistics. Gasoline prices decreased 3.8%, significantly offsetting 0.2% increases in both food and shelter prices. Though shelter was higher for the month, it rose at the slowest monthly pace in three years and is now 5.2% higher than a year ago. Shelter remains the biggest obstacle for inflation, given it represents one third of the overall CPI, but economists continue to cite real time data showing signs that the rental market is cooling. The CPI is a lagged indicator because readings reflect past data.

Earnings season is in full swing with 75% of the S&P 500 companies having reported results for Q2 2024. Results were skewed to the upside with 78% of companies reporting a positive earnings per share (EPS) surprise and 59% of companies reported a positive revenue surprise, according to FactSet. In aggregate, companies reported earnings 4.5% above estimates, which is below the five-year average of 8.6% and the 10-year average of 6.8%. For Q2, the blended year-over-year earnings growth rate so far for the S&P 500 is 11.5%. If this earnings trend persists, it would mark the highest growth rate since Q4 2021. The technology sector continues to account for a large portion of the earnings growth, delivering year-over-year earnings growth of 18.7%. Investors continue to focus on guidance, and companies have been more cautious in their outlook as 39 S&P 500 companies have issued negative EPS guidance, while 35 have issued positive EPS guidance for Q3 2024. We have seen valuations come in slightly as the forward 12-month P/E for the S&P 500 is 20.7 vs. the five-year average of 19.3 and 10-year average of 17.9.

The data continues to unsettle investors, as it reflects an economy growing above trend, while also showing signs of slowing. Valuations remain elevated, especially in large-cap technology stocks; however, market opportunities have started to broaden as more sectors and assets classes look attractive on a relative basis. We expect volatility to remain elevated as geopolitical tensions heat up, central banks interest rate paths diverge (see Japan) and the election nears in the United States. Investors should use volatility to rebalance their portfolio to strategic weights.

Source: Earnings Insight, FactSet, Aug. 2, 2024

Authored by Jeremy Robert

Markets posted mixed returns in June based on economic data that reflected the domestic economy is still growing, but at a slower pace. Inflation came in better than expected after holding stubbornly high for months. Navigating these markets continues to be challenging as investors try to interpret the trends in retails sales, jobless claims and new construction data, as well as speculate on the next rate move by the Federal Reserve. Against this dynamic backdrop, large cap stocks continued to outperform their small cap peers with the S&P 500 climbing 3.6% in June, while the Russell 2000 (small cap index) delivered a -0.9% return. A handful of technology stocks in the S&P 500 were responsible for much of the indices’ return; this performance concentration is more clearly illustrated when seeing that the equally weighted S&P 500 delivered a negative return of 0.51%. Bonds delivered their first back-to-back months of positive returns in 2024 as yields continued to move lower, boosting the Bloomberg U.S. Aggregate Bond Index higher by 0.88% for the month.

Inflation data for May showed prices pulled back, giving investors relief that inflation is heading in the right direction after months of mixed data. The Consumer Price Index (CPI) rose 3.3% in May from a year ago, which was lower than the 3.4% annual rate in April. Leading to the slight decline in the CPI Index were lower gasoline prices and stabilization in food prices. Although we continue to see progress, and we are well off the 9.1% peak in 2022, we remain well above the Federal Reserve’s target of 2%. Housing remains a trouble spot for the inflation fight with shelter inflation up 5.4% annually in May, down slightly from the 5.5% annual figure in April. The persistent increase in shelter costs shows the ongoing pressure in the housing market. As the data continues to show progress, the Federal Reserve continues to reiterate the need for more consistent data before lowering interest rates.

The market now looks to earnings season for insight into the performance of companies as the consumer and economy show signs of softening. Earnings have been a bright spot and have exceeded expectations thus far in 2024, but mostly on the back of a handful of technology stocks. According to FactSet, the estimated year-over-year earnings growth rate for the S&P 500 is 8.8% for Q2 2024. This would mark the highest year-over-year growth rate reported by the index since Q1 2022 of 9.4%. Earnings guidance continues to be a focus of the market, providing investors with an inside view of the impact current conditions are having on individual companies. For Q2, 67 S&P 500 companies have issued negative earnings per share (EPS) guidance, while 45 S&P 500 companies have issued positive EPS guidance. Valuations continue to be a concern for the market, with the forward 12-month price earnings ratio (P/E) for the S&P sitting at 21 today compared to the five-year average of 19.3 and 10-year average of 18.

Few participants expected the market to rally to levels seen this year, even though the returns have been driven by only a handful of stocks. Looking ahead, we believe worries over consumer spending, softening economic data and an uncertain path for interest rates will cause volatility. Furthermore, a highly contested election in the U.S. and various precarious geopolitical conflicts, makes this a good time for investors to avoid emotion and stay confident in their long-term investment strategy. Following an approach tailored to your objectives and considering your time horizon and risk tolerance allows one to stay invested and ride out any short-term turbulence.

Source: Earnings Insight, FactSet, July 3, 2024

Authored by Jeremy Robert

Following a challenging April, stocks and bonds posted strong returns in May. Stocks rose on stronger than expected company earnings, moderating inflation data and cooling GDP growth expectations. This economic data supported a goldilocks narrative, not too hot and not too cold, that investors believe may allow the Federal Reserve to begin cutting rates sooner. The rally in stocks was broad based across large cap, small cap and even international equities. Large cap stocks (S&P 500) and small cap stocks (Russell 2000) both delivered 5% returns in May, while international stocks (MSCI EAFE) posted 6%. Emerging markets returned 2.2% and continued to underperform the broad market as weakness in the Chinese economy remained a hindrance. Meanwhile, subdued growth, along with initial signs of weakness in the labor market, caused treasuries to decline. This resulted in positive performance for bond investors with the U.S. Aggregate Bond Index delivering returns of 1.7%.

Inflation eased slightly in April after coming in higher than expected in March. The Consumer Price Index (CPI) rose 0.3% in April below estimates of 0.4%, and the CPI increased 3.4% on a 12-month basis, which was in line with expectations. Excluding volatile food and energy, core inflation came in at 0.3% and 3.6% on an annual basis. The 12-month core reading was the lowest since April 2021. Shelter costs continued to drive inflation, increasing 0.4% for the month, and up 5.5% from last year. Inflation outpaced earnings as workers saw earnings fall by 0.2% on the month. Although inflation is moving in the right direction, it remains well above the Fed’s 2% target.

Q1 2024 earnings reports were almost complete with many companies reporting stronger results than expected. According to FactSet, 78% of S&P 500 companies reported a positive earnings per share (EPS) surprise, and 61% of the S&P 500 companies reported a positive revenue surprise. For Q1, blended earnings growth for the S&P 500 was 5.9%, which will mark the highest year-over-year earnings growth rate by the S&P 500 since Q1 2022, which was 9.4%. Earnings guidance was mixed, but skewed to the downside as companies are cautious looking forward. It was not surprising to hear that executives are tempering expectations given their increasing concerns over a consumer and economic slowdown. Against this backdrop, stock valuations remain elevated vs. historical averages with the forward 12-month price earnings ratio (P/E) for the S&P 500 now 20.3 vs. the five-year average of 19.2 and the 10-year average of 17.8.

The market will continue to focus on every economic data report to determine whether it supports the soft-landing narrative. The emphasis today remains on inflation, growth and earnings reports, but the election will start to receive more attention as November approaches. Investors will also be keeping a close eye on the geopolitical landscape and the risks those conflicts may cause for the global economy. Broad market valuations remain elevated relative to history, but earnings continue to accelerate and the concentration in select stocks is masking opportunities outside the large cap technology companies. In times of uncertainty, investors will be rewarded for staying calm and following their strategic investment approach based on their time horizon and risk tolerance.

Source: Earnings Insight, FactSet, May 31, 2024

Authored by Jeremy Robert

April proved to be a challenging month for both equity and fixed income markets as investors tried to make sense of mixed economic data. The combination of hotter than expected inflation and weaker than expected, but still strong, U.S. GDP growth added to market fears that the central bank would not be cutting interest rates as quickly as previously anticipated. The sell-off in equities was led by small cap stocks, represented by the Russell 2000, which was down 7% for the month due to their sensitivity to interest rates. The technology-heavy Nasdaq sank 4.4%, while the S&P 500 delivered a negative 4.1%. International stocks held up better than their U.S. counterparts with the EAFE index down only 3.2%, while emerging markets stocks finished higher at 0.7%. Additionally, fixed income investors experienced negative performance with the U.S. Aggregate Bond Index finishing 2.4% lower for the month.

The last mile of the Federal Reserve’s inflation fight has proven to be the most challenging. The Consumer Price Index rose 3.5% in March on an annual basis, which was higher than the 3.2% in February. The stronger report in March was driven by continued increases in shelter and energy prices, which together contributed more than half of the month-over-month headline gain. However, there have been a few bright spots where prices have been moderating including food, used and new vehicles and airline tickets. The silver lining from the inflation data is that household buying power has risen over the past year. Average workers' “real” hourly earnings, which accounts for pay after inflation, increased 0.6% year-over-year. Recent inflation data has forced the market to rethink rate cut expectations for 2024, with some now expecting only one rate cut this year. The Federal Reserve continues to affirm they are comfortable waiting to cut interest rates until they see more progress on inflation.

Driven by a strong consumer and a resilient economy, Q1 earnings season has been stronger than expected. Roughly 80% of the companies in the S&P 500 have reported, and 77% of the companies have reported a positive earnings per share (EPS) surprise, while 61% reported a positive revenue surprise, according to FactSet. The blended year-over-year earnings growth rate for the S&P 500 is 5%, which represents the highest year-over-year growth rate since Q2 2022. Companies continue to be cautious in their earnings guidance with 41 S&P 500 companies issuing negative EPS guidance, while 34 have issued positive EPS guidance for Q2 2024. Despite the potential for an economic slowdown, analysts continue to lower their EPS estimated less than they have historically. Although earnings have improved the valuation backdrop, valuations remain stretched relative to history as the 12-month forward price earnings ratio (P/E) is 19.9 above the five-year average of 19.1 and the 10-year average of 17.8.

We continue to see mixed data on the economic front – strong economic growth, a tight labor market and slowing inflation. However, worries over geopolitical risk, our country’s issues related to government debt and the divisiveness leading up to the election present uncertainty. Technology has significantly changed the way market participants receive data and headlines, with up-to-the-minute updates causing many investors to focus on short-term stressors. We believe those who stay on track with a strategy driven by their time horizon and risk tolerance, and avoid being reactionary, will be rewarded. The best way to navigate market environments like this is to remain well diversified across regions, sectors and duration.

Source: Earnings Insight, FactSet, May 3, 2024

Authored by Jeremy Robert

The market continued to reward equity investors in March as the S&P 500 reached all-time highs eight times during the month, propelled by better-than-expected economic growth, strength in the labor market and market participation beyond technology stocks. Investors remain concerned over stubbornly high inflation, which is reflected in the wide swing in rate cut expectations for 2024, from seven rate cuts at the beginning of year to three rate cuts as of the end of March. Against this backdrop, the S&P 500 posted gains of 3.1% bringing the year to date (YTD) return to 10.2%, while the Nasdaq rose 1.3% finishing the quarter up 8.7%. U.S. small cap stocks continued to post modest gains on rate cut expectations, up 3.6% in March and 5.2% YTD. International stocks also experienced gains, as the EAFE index was up 3.4%, while emerging markets finished the month up 2.7%. Fixed Income investors enjoyed some relief as the Federal Reserve struck a dovish tone at the March meeting. The Aggregate Bond Index gained 0.9% for the month but remains down -0.74% for the year.

The Consumer Price Index (CPI) increased 0.4% for the month of February and 3.2% from a year ago, confirming that getting to the 2% target is challenging. The monthly increase was in line with expectations, but the 12-month increase was higher than expected. Energy prices increased 2.3%, while shelter rose another 0.4%, continuing to be a considerable headwind in the fight to return inflation to 2%. According to the Bureau of Labor Statistics, the increase in energy and shelter accounted for 60% of the total gain. With the data coming in higher than expected, the Federal Reserve reiterated they are not in a rush to cut rates until they feel more confident inflation is on the path towards 2%. Federal Reserve officials still have three rate cuts penciled into their “dot plot” for 2024, but the headwinds continue with rising home and energy prices, global supply change challenges overseas and a very resilient labor market.

With Q4 2023 earnings in the rear view, investors will look ahead to Q1 2024 earnings with a focus on margins and guidance. According to FactSet, the estimated earnings growth rate for the S&P 500 is 3.6%, which if comes in as expected, would mark the third consecutive quarter of year-over-year earnings growth. However, analysts have revised their earnings expectations since the beginning of the year as they expect earnings growth of 5.8% for the S&P 500 year-over-year earnings for Q1 2024. Earnings guidance has also skewed to the downside, with 70 S&P 500 companies issuing negative earnings per share (EPS) guidance, while 33 S&P 500 companies have issued positive EPS guidance for the quarter. Valuations remain above historical averages with the forward 12-month price/earnings ratio at 20.9x, above the five-year and 10-year averages of 19.1x and 17.7x.

The economic backdrop continues to drive the market higher; however, worries over inflation and weakening consumer confidence could dampen investor enthusiasm. The market narrative changes by the day, so investors will benefit from diversification and patience. Although money market rates remain attractive, we like the opportunity that higher rates provide to lock in higher income generating bonds, thereby mitigating reinvestment risk when the Federal Reserve starts cutting rates. Furthermore, investors can take advantage of this dynamic environment by dollar-cost-averaging monies into the market – long-term success is predicated on time in the market, not timing the market. 

Source: Earnings Insight, FactSet, March 28, 2024

Authored by Jeremy Robert

Most major stock indexes were positive in February driven higher by strong economic data and solid company earnings. GDP increased at a 3.2% annualized rate in Q4 2023. This is a slowdown from a very robust third quarter, but still healthier than anticipated, and the labor market continued to exhibit durability with nonfarm payrolls increasing by 353,000, almost twice consensus expectations. Against this backdrop, investors remained focused on the growth prospects tied to artificial intelligence, with the technology-heavy Nasdaq up 6.2% as compared to the S&P 500 up 5.3%. The Russell 2000 posted a 5.6% gain as small cap stocks moved higher on the prospect of rate cuts starting sometime this year. Conversely, international stocks did not fare as well, with the EAFE index only posting a 1.8% return for the month. Bonds had a challenging month, down 1.5% as a hotter than expected inflation reading pushed the timing of rate cuts into later this year.

January Consumer Price Index (CPI) came in higher than expected, with headline CPI rising 0.3% month-over-month, and 3.1% year-over-year, while Core Inflation (removing volatile food and energy) increased by 0.4% month-over-month, and 3.9% year-over-year. Shelter continues to drive much of the increase in the CPI index, climbing 0.6% on the month, contributing more than two-thirds of the increase in headline inflation according to the Bureau of Labor Statistics. January reported the fastest monthly increase in owner’s equivalent rent in 9 months, and shelter has risen by 6% over the past 12 months. Food prices moved higher, up 0.4% for the month, while energy decreased 0.9%, largely driven by lower gas prices. At the January meeting, the Federal Reserve statement suggested the committee is biased towards cutting interest rate. However, they may not begin cutting as soon as the market expects. The Fed remains focused on returning inflation to 2%. Given the current environment, the Fed is prepared to keep rates higher for longer, waiting for the data to reflect progress before making any cuts to rates.

Earnings season for the fourth quarter of 2023 is winding down with 97% S&P 500 companies having reported results. Earnings growth has been notable, with the blended year-over-year growth rate for the S&P 500 coming in at 4%, which marks the second straight quarter the index has reported earnings growth according to FactSet. However, companies continue to lower expectations as 71 S&P 500 companies have issued negative Earnings Per Share (EPS), while 30 companies have issued positive EPS guidance. Seven of the 11 sectors have reported year-over-year earnings growth led by communication services, consumer discretionary and technology while four sectors have reported year-over-year earnings decline including energy, materials, healthcare and financials. The S&P 500 forward price earnings ratio is 20.4x, above the five-year average of 19.0x, and 10-year average of 17.7x.

In this current environment, investors can cite data points for being optimistic (bullish) or for being pessimistic (bearish) going forward. Investors should expect uncertainty in the coming months as the market continues to speculate on rate movements, mixed financial data, political turmoil in Washington and geopolitical tensions around the globe. It is prudent to understand what comprises your portfolio and to mitigate your risk by diversifying among asset classes, regions and sectors.

Source: Earnings Insight, FactSet, Feb. 29, 2024

Authored by Jeremy Robert

Following a strong end to 2023, asset class returns were mixed in January as doubts began to build regarding the potential to achieve a soft landing. The data continues to reflect a strong economy, slowing inflation and a resilient labor market. This boosted investor confidence that we were enjoying a goldilocks environment (not too hot and not too cold), increasing expectations for multiple rate cuts by the Federal Reserve beginning as soon as March. However, at their January meeting, the Federal Reserve tempered expectations for rate cuts, sending yields higher and stocks lower to end the month. Large cap stocks took back leadership and continued to deliver strong returns, up 1.6%, while interest rate sensitive areas of the market like small cap stocks were down 3.9%. International developed stocks were flat for the month while emerging market stocks fell 4.6% despite efforts from China to deliver large scale stimulus to their economy. Fixed income gave back some of its strong Q4 return as the U.S. Aggregate Bond Index ended down 0.3% for the month with yields rising.

Inflation increased more than expected in December as the Consumer Price Index (CPI) rose 0.3% for the month, higher than the 0.2% economists expected. On a 12-month basis, CPI rose 3.4% in 2023, relative to economists’ expectations of 3.2%. Stripping out food and energy prices, there was a rise in Core CPI, 0.3% for the month and 3.9% from a year ago, marking the lowest reading since May of 2021. Shelter costs rose 0.5% in December and accounted for more than half the Core CPI increase. Shelter rose 6.2% on an annual basis and remains a focus for investors looking for inflation to decrease to the Federal Reserve’s 2% target. We continue to see the impact of higher prices on consumers, but the strength of the labor market and substantial portion of investors locked into low mortgage rates has propelled consumers to spend. Against this backdrop, the Federal Reserve signaled they will be patient and wait until inflation settles at their 2% target. We expect the Federal Reserve will keep rates elevated longer than the market anticipates, increasing the volatility in rates and stocks.

The fourth quarter earnings season is underway with 46% of S&P 500 companies having reported results. Earnings in aggregate have been positive. According to FactSet, 72% of companies have reported a positive earnings per share (EPS) surprise, and 65% have reported a positive revenue surprise. For Q4 2023, the blended earnings growth rate for the S&P 500 is 1.6%, which reflects earnings growth for the index. Companies have been reducing expectations with 31 companies issuing negative EPS guidance and 17 issuing negative EPS guidance. Despite concerns of slowing economic growth, analysts lowered their estimates by a smaller margin than average in January. Valuations remain elevated for the S&P 500 Index relative to history with the forward 12-month price earnings ratio (P/E) at 20 times above the five-year average of 18.9 times and ten-year average of 17.6 times.

Despite the broadening out of market participation in Q4 2023, doubts about a soft landing have shifted the leadership back to large cap stocks, specifically technology stocks. If the past 18 months have taught investors anything, it is that the market narrative can change by the day, so it is best to avoid being reactionary in the short-term. Typically, a strong economy, tight labor market and increasing consumer confidence would be celebrated. However, in this environment, investors are worrying over the potential impacts these themes will have on inflation and how the Federal Reserve will respond. With the market’s outsized movements last quarter, investors should expect increased volatility going forward. Attention will be concentrated on incoming data and whether it will support the “soft landing” narrative. With such uncertainty in the path forward, it is prudent to remain diversified particularly when you can collect a healthy yield outside of stocks.

Source: Earnings Insight, FactSet, Feb. 2, 2024

Authored by Jeremy Robert

Equities and fixed income posted healthy gains in December, driven by moderating inflation, a less hawkish Federal Reserve and continued resilience by the consumer. The economic data continues to support the soft-landing narrative, as the market is now pricing in interest rate cuts in 2024. This expectation led to yields plummeting across the curve, which resulted in asset classes rallying across the board. Furthermore, investors began to look outside large cap technology stocks for opportunities, propelling the S&P 500 up 4.5%, while the Nasdaq was up 5.6% and the Russell 2000 surged 12.2% for the month. Reflecting a broadening out of market participation, all eleven sectors were positive in December led by real estate up 8.8% and industrials up 6.1%. Fixed income investors also enjoyed healthy returns with the U.S. Aggregate Bond Index rising 3.7% boosted by higher income generation and decreasing yields. Following such strong returns across global markets, and stretched valuations, we anticipate increased volatility going into 2024.

Inflation continued to show progress in November with the Consumer Price Index (CPI) increasing 0.1% and up 3.1% from a year ago, in line with expectations. Energy prices were a bright spot and decreased 2.3% in November, while food prices increased 0.2%. Shelter prices continued to be a headwind, increasing 0.4% for the month of November, up 6.5% from this time last year. The annual inflation rate has showed a steady decline since peaking in early 2023 but remains elevated because shelter makes up one-third of the CPI index. While there continue to be positive signs, falling inflation does not necessarily translate into decreasing prices, just that prices are rising at a slower pace. Since just about everything is more expensive today than it was prior to the pandemic, this is likely to negatively impact consumers in 2024 and beyond. The Federal Reserve will continue to be “data dependent,” and if they see inflation remain stable but growth deteriorating, they are likely to start cutting rates in 2024.

Q4 earnings season is fast approaching and will kick off in a few weeks. For the fourth quarter, estimated earnings growth expectations for the S&P 500 are 2.4% year-over-year according to FactSet. This will mark the second straight quarter of growth for the index if earnings meet expectations, even after a strong 4.8% earnings growth in Q3 2024. Earnings guidance is skewed negative with 72 S&P 500 companies issuing negative earnings per share (EPS) guidance and 39 companies issuing positive EPS guidance. Earnings revisions continued to be lowered by analysts with per share basis estimated earnings decreasing by 5.8% since Sept. 30th. This is larger than the five-year average of -3.5% and 10-year average of -3.3%. Investors will be keenly focused on the fourth quarter’s earnings season as stock prices have risen dramatically to finish the year. The 12-month forward price earnings ratio (P/E) currently sits at 19.3, above both the five-year average of 18.8 and the 10-year average of 17.6.

After a solid finish to 2023, investors will have little time to celebrate, as we will receive a slew of economic data at the beginning of January. However, with greater participation across asset classes and regions, investors can be optimistic about harnessing opportunities outside of mega-cap technology companies. Furthermore, even though yields have decreased across the curve, fixed income remains attractive and can function as a hedge in times of volatility. It is important to remember that the stock market is not the economy, and vice versa. Trying to predict where the economy is going is a fool’s errand since the market is always forward looking. Amidst this backdrop, it is prudent to remain well diversified and understand what companies comprise your portfolio.

Source: Earnings Insight, FactSet, Dec. 15, 2023