Weekly Recap:

by Eric Criscuolo & Michael Reinking, CFA

As the Closing Bell sounds to end the week, the Atlanta Hawks are still trying to cut into the Knicks lead from last night...

Last week was once again full of conflicting news on the Iran situation. The push and pull from the zig-zagging headlines, on top of the avalanche of earnings, kept the S&P in a tight 1.5% range and led to a modest gain overall. It was a consolidation of the rapid move higher over the prior 3 weeks. The standout was Tech. The NYSE 100 Index was up over 2% but the semiconductor index rose 11%, including a 5% gain on Friday which made it 18 straight days of gains for that index.   

Iran-related news continued to swing this way and that, but two much different topics were able to capture more attention from investors this week: the Fed meeting and mega cap tech earnings. Leading in to those, the SOX semis index saw that win streak come to end on Monday, which served as a prelude to the AI grenade that the WSJ threw at the market. The outlet published an article that said OpenAI missed growth targets and the CFO was worried about the ability to pay its other-worldly future compute obligations. Like showing a six-year-old Friday the 13th before bed, the article cut right to the nightmare scenario for the Bulls: the AI spend in all of its forms was simply unsustainable, at best. Unsurprisingly, that put the entire AI complex under pressure and took the ICE semiconductor index down 4%. It also created an interesting set-up for the giant tech earnings to come the next day.

Before those prints hit the tape, we had the Fed’s rate decision. We'll go into a few more details below, but the Fed kept rates unchanged as expected and the overall tone moved more Hawkish. When Powell left the podium, it was time to pivot to those tech earnings. Overall the numbers continued to explode off the screen. Alphabet, Amazon, Meta and Microsoft easily beat estimates and posted stellar growth numbers in cloud and AI related metrics. They also collectively spent over $130 billion on capital expenditures….in this quarter alone… and are on track to hit $725 billion for the full year. Revenues are stratospheric but spending is other-worldly, and that is in part leading to a divergence between the optics of the results and the reaction of the stocks. The next day Meta was down almost 10%, Microsoft off 4%. Alphabet came out much stronger, up 10%. These types of reactions are becoming more and more common as valuations have already priced in extraordinary results and concerns about off-the-charts spending, without definitive ROI (highlighted by the WSJ article) remain firmly in place.

Despite the mixed reactions in those stocks, equities saw broad gains on Thursday and the S&P closed at another all-time high, right around 7200. We followed up the record close by gapping up on Friday, heading toward 7300 before pulling back, finishing modestly higher and setting another closing record.

For the week, the S&P was up 1%. Equities powered through another move higher in oil and a backup in yields. It looked like we were headed for another period of consolidation but the index saw upside momentum in the latter half of the week. Small caps were inline but the equal-weight lagged.

Looking at the sectors, Comm Services led but that was mainly driven by Alphabet's 10%+ gain, through most of the sector was higher. Energy was again among the leaders as crude saw more gains, though most of it was earlier in the week. Tech was modestly higher- software was the main driver of weakness earlier in the week but popped on Friday with some strong earnings reactions. Seven of eleven sectors were up around 1% or more. Materials was the only sector lower this week. Miners fell with gold and copper. Chemicals were mixed while containers and packaging were mostly lower.

We also closed out the month of April this week. The S&P gained 10% as it hit record highs while powering through a war with Iran. Incredibly, it was the S&Ps best month since November 2020. The Growth factor and Momentum roared back and easily outpaced Value, especially with the largest stocks. The tech-heavy sector (Comm Services, Tech and Consumer Discretionary) led the way. The ICE Semiconductor Index was up over 40% and the IGV software ETF gained 5%, cutting into a 20%+ decline YTD. Energy was the only sector meaningfully lower while Healthcare also finished April in the red. 

The S&P has come rocketing back from lagging other major global indexes as it took off in April. Other exchanges posted gains for the month as well, but were more modest than the US. Japan remains well above the pack and other geographies have also seen very strong gains (looking at you South Korea).   

With equities at uncharted levels and galactic-sized spending on AI buildouts continuing, its fitting that the NYSE welcomed the astronauts of Artemis II to the trading floor on Friday, hosted NASA to ring the Opening Bell and convened leaders in the industry for a Space Summit. The timing was stellar, you could say.

The potential for Jerome Powell to stay on as Fed chair on a temporary basis after his term ends on May 15 likely ended when the Senate Banking Committee voted this week to advance Kevin Warsh’s nomination to a full Senate vote. We wouldn’t be fulfilling our market commentary mandate if we didn’t note that Senator Elizabeth Warren once again called Warsh Trump’s “sock puppet”, which I guess is better than Trump’s Dummy, and was “uniquely unfit” for the job. 

As for the FOMC meeting, you can read our full Fed recap here. Overall, the decision to keep rates unchanged was as much of a certainty as there is in financial markets. The biggest news was that Jerome Powell, for his last presser, probably, as Fed chair, turned it into The Clash meeting, addressing the question on everyone's mind, "Should I Stay or Should I Go?". Well, he's sort of staying... remaining as a Fed governor after his term as Chair ends. His decision was based on his concern from the legal attacks on the Fed, and not from the “verbal criticism” lobbed his way by unnamed heads of state.

The other main takeaway was that dissension within the committee continued to evolve. While Stephen Miran remained the only dissenter on the rate decision, Beth Hammack, Neel Kashkari, and Lorie Logan wanted to alter the statement by removing the “easing bias”, and instead balance it with commentary that the next move rate move is just as likely to be a hike as a cut. Overall this was a somewhat hawkish Fed meeting but not dramatically so as this has largely been playing out publicly over the last few months.

 

There were a few big pieces of economic data that, while not exactly robust, supported the resilient economy narrative. The initial Q1 GDP reading came in at 2.0%, below consensus of 2.3% but picking up from 4Q’s 0.5%. Consumer spending rose 1.6%, down from last quarter’s 1.9%, while Business spending rose solidly (+10% non-residential fixed investment).

March core PCE rose 0.3% m.m and 3.2% y.y , about in line with estimates. Headline was inline as well. It continues to show inflation running well-above the Fed's 2% target, underscoring the Hawkish evolution of the FOMC. However, it was also better than feared given environment.

Personal Income and Spending provided more evidence of resilience. Income rose 0.6% in March, above consensus, and up from a flat February. Spending accelerated from February (+0.9% vs 0.6%) and was inline. Jobless claims remain quite low, falling below 190k while continuing claims fell below 1800k (see below).

The April ISM Manufacturing PMI was unchanged with last month (52.7), and a bit below consensus, but once again showed the manufacturing sector holding up, though there were some weak spots in the report. New Orders improved, but Production, Order Backlog and Employment fell, and Prices jumped again.    

Treasuries/Currencies - There was a flattening of the curve as global yields moved higher along with oil prices and amidst some modestly hawkish central expectations. The USD pulled back modestly this week with much of the action happening in the Yen for reasons we'll discuss in more detail below.

Copper has been the relative outperformer back near the February highs. 

Global Equities - markets mixed this week, consolidating recent gains but strong for the month. Similar to the US tech heavy indices outperformed. There were multiple central bank meetings which on a relative basis were more hawkish than the FOMC meeting with the BoE, ECB and BOJ all expected to hike in the near term. 

Start off the weekend with some Mint Juleps while watching the 152nd running of the Kentucky Derby and taking notes on Berkshire Hathaway's Annual Shareholder meeting- the first for new CEO Greg Abel. Earnings will continue rolling out, including Pfizer, Disney, Uber, AMD, McDonalds, CoreWeave, Palantir, and Airbnb. The April jobs report will headline the economic data, with ISM Services and the Treasury's quarterly refunding report also important events. The Senate could vote on Kevin Warsh's nomination. Go Knicks and have a great weekend.      

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