Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last Friday a social media post by Iran’s Foreign Minister that the Strait of Hormuz was open to commercial traffic during the ceasefire put an exclamation point on last week’s rally. The S&P 500 ended the week up 4.5%, closing at a new all-time high, and extending its >3% weekly winning streak to 3. That statement was later disavowed by other factions within Iran, but oil prices tumbled none the less with ICE Brent ending the day down ~10% at $90. 

Over the weekend the IRGC attacked multiple ships in the Strait, and the US seized an Iranian flagged ship, yet there was still some hope that another round of negotiations would take place in Pakistan this week. Despite the events of the weekend the pullback on Monday was shallow with most major US indices ending on either side of unchanged. There was a little more weakness on Tuesday after VP Vance didn’t board his plane to Pakistan and it looked like talks were dead ahead of the ceasefire deadline. However, shortly after the close President Trump indefinitely extended the ceasefire giving the “fractured” Iranian government time to come back to the table. The conflicting headlines have continued to swirl throughout the week causing some intraday volatility even reaching absurdity at points. On Thursday, there were reports that Tehran air defense systems were activated sending markets lower, which turned out to just be friendly gunfire at a pro-regime march where Onyx was playing in the background.

Despite all the back-and-forth headlines and escalating maritime tensions there has been a significant compression of volatility at the index level. We’re heading into the weekend on a positive as there are reports both Iran and the US will have representatives in Pakistan this weekend though no official negotiations have been confirmed. The S&P 500 traded in a ~1.5% range during the week, ending modestly higher with technology doing most of the heavy lifting. The NYSE 100 index was up >2% but the Semiconductor index, which enters the weekend on an18 session win streak, was the star of the show up >10% for the week and 50% YTD (more below). The other notable index move was the Dow Jones Transportation index which fell >5% this week. The index has been moving higher over the last couple of weeks as a short squeeze in Avis Budget sent its shares sharply higher and it became the largest component of the index which is price-weight. However, the CAR crashed this week, falling ~75% from its high, taking the index down >5%. 

Outside of the swirling Iran headlines earnings was the other big story this week and is impacting sector level performance. A little over a quarter of companies in the S&P 500 have now reported and the numbers have been strong. Over 80% of companies have beaten both EPS and revenue estimates. Companies have been reporting earnings that are on average 12.3% above estimates, bringing the blended growth rate for the quarter to ~15% y/y.

At the start of the year investors were looking for a re-acceleration of economic activity. The mix of economic data and earnings have confirmed this was coming to fruition ahead of the start of Epic Fury. The question going forward is whether the increase in energy prices and supply chain disruptions will derail that? In the short term it looks like it may have actually pulled forward some demand as we’re seeing improvement in the survey data. Management teams remain cautiously optimistic while acknowledging the potential headwinds forming. This is creating a situation which we’ll call, the guidance gap, where companies are beating quarterly numbers but not necessarily increasing guidance. We’ve seen this dynamic play out in financials, pockets of industrials and consumer-facing companies.

However, there is clearly one area of economy where no conservatism is necessary…..survey says….anything related to the AI and data center capex boom. As we mentioned in our earnings preview, technology companies accounted for about half of the positive pre-announcements, driving the y/y growth estimates for Q1 up by 10% from the start of the year to 45%. Within semiconductors demand is broadening beyond just the high-performance silicon chips powering LLM’s to CPUs and semiconductors that are used in other components within data centers. Multiple companies had blowout earnings this week including Intel, Texas Instruments and STMicroelectronics. The later companies highlighted an improvement in industrial demand (which also encompasses some data center) but they’ve also noted strength in aerospace and defense, energy infrastructure and some improvement in consumer electronics, though there is some concern that could be hurt later this year with the increase in memory costs. Auto remains the one segment that is still lagging though companies have noted cleaner inventories setting the stage for an upturn. You can see some of the catchup in the chart below. 

Industrials is another sector where the capex boom was apparent with very strong numbers from companies levered to non-residential construction, infrastructure and the power sector including GE Vernova and United Rentals. Transportation companies have also had positive results with trucking companies highlighting strong demand along with the regulatory induced reduction in capacity. Rail companies are also seeing an improvement in demand as some customers are looking for alternatives as freight rates and fuel costs increase. Airlines have noted strong Q1 spending in both the consumer/business categories. This industry is in the cross hairs of higher energy costs and companies are taking steps to increase prices and remove capacity. Aerospace and defense stocks broadly struggled this week with companies highlighting strong demand but some concerns about margin pressure as input costs increase and supply chain constraints.

Here are some other notable earnings/news snippets:

On Friday, the Justice Department announced it was ending its criminal investigation of Powell, which  should in turn see Senator Tom Tillis remove his opposition to Warsh's advancement from committee to full Senate vote.

The advanced March Retail sales estimate came in stronger than expected, especially the Control Group which feeds into GDP. Gas station sales rose 16% from February, surprising no one, Department stores saw a 4% increase and home furnishings rose 2%.  

Q1 GDP will be released next week. The Atlanta Fed's GDPNow Q1 tracker moved up from 0.95% to 1.24% after the Sales data. The NY Fed Nowcast stands at 2.4%.

S&P Global April flash PMIs showed a pickup in Manufacturing, which rose from 52.3 last month to 54.0 and beat estimates. Output rose at the best rate in the past four years, with Orders at the best level in two years. Supply chain disruption was apparent as Supplier delivery times saw the greatest lengthening since August 2022. The Services readings were more subdued, increasing slightly overall from 49.8 to 51.3. That was the second lowest reading over the past year. Not surprisingly, prices in both surveys rose again.

Ahead of the FOMC rate decision next week, and after Kevin Warsh’s senate testimony, Treasury yields rose ~7bp out to the 10y this week, following oil prices moving higher. The US Dollar Index followed rates higher, gaining 0.5%. The index failed to get above its 50d ma ~98.70 and turned back toward its 200d ~98.35.

Global Equities - Europe lower, Asia mostly higher 

It's a Lollapollooza of market events next week. Monetary policy will headline the first main stage. Wednesday could be Jerome Powell's last rate decision as Fed chair. Japan, the BOE and ECB will also hold rate decisions. Tech earnings will headline the second main stage, with all hyperscalers ex-ORCL reporting, on the same night. AAPL will report as well, and so will GM, F, KO, UPS, V, GM, QCOM, CAT, LLY, and XOM, among many others. The first estimate of US Q1 GDP will also be a key event. Hopefully the Knicks will figure it out and move on to the next round. If you're heading to to the Savannah Bananas game at Yankee Stadium on Sunday, let us know.          

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