Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last week the primary focus was on the hot inflation data and President Trump’s trip to China. Throughout much of the week the tech/AI related strength continued to push the S&P 500 to new all-time highs, closing above 7,500 on Thursday.  However, technically there were some cracks beneath the surface as breadth was poor and defensive sectors like consumer staples were outperforming. Oil prices and yields spent much of the week hovering just below recent highs. Overnight on Friday, global yields surged following a hot inflation print in Japan and continued political uncertainty in the UK, pulling Treasury yields up with them. Yields broke above key technical levels, which also broke proverbial camel’s back, triggering a selloff across equity markets. Major US indices fell >1% across the board with the semi/memory stock leadership down nearly ~5%. Small and midcap indices ended the week down ~2.5% but the S&P 500 was able to eke out a slight gain for the week, extending its winning streak to 7 weeks.

Speaking of winning streaks, the Knicks extended theirs last night to nine straight, the longest post season winning streak in franchise history. There have been 13 teams in NBA history to achieve this mark in the playoffs, 7 of those teams went on to bring home the Trophy, let’s make it 8! This week the S&P 500 did just that, ending the week up just over 1%. The last time the index closed higher for 8 consecutive weeks (ultimately 9) was at the end of 2023.  It wasn’t exactly smooth sailing (pun intended) to end up here as investors continued to grapple with volatility inducing Iran headlines, climbing interest rates and stretched equity leadership.  

Heading into last weekend with the China summit in the rear view, there were concerns that the administration would refocus its attention on Iran with the potential for military action to restart. Coming out of the weekend, markets extended to the downside before a late day reversal on Monday after President Trump said he postponed a strike at the request of Middle East leaders due to “serious negotiations”. Equities recouped most of the losses in the final hour of trade but were back under pressure again on Tuesday after President Trump reminded everyone that the pause was temporary and another “big hit” could be imminent. The floor was buzzing on Wednesday after the Knicks historic 4th quarter comeback and markets resumed to the upside after there were more press reports a deal was close. The optimism has carried through heading into the holiday weekend despite a spotty weather forecast and the fog of war remaining thick. Details of the reported proposal/agreement remain scant with the opening of the Strait and the handling of enriched uranium still potential sticking points (at least it’s only the two biggest issues to begin with).

Markets faded a bit into the close with the S&P 500 up ~1%. The equal weight version of the index and Dow Jones Industrial Average were both up >2.5% hitting new all-time highs this week for the first time since May 7th and February, respectively, while mid/small cap indices were up between 1.5% - 2.5% recouping most of last week’s losses, closing just below their all-time highs. 

To start the week the tech leadership remained under significant pressure but on Tuesday afternoon many of the semi/memory stocks reversed sharply as the buy the dip crowd emerged. At the lows NYSE Semiconductor index tagged its 20d ma down ~6% for the week and ~12% off the highs. However, throughout the remainder of the week the sector came roaring back ending up >5%, closing at a new all-time high again (see what I mean about it not being smooth sailing). That rally happened despite the largest component, Nvidia, falling ~4% after earnings. As expected, the company beat estimates and reported robust growth metrics: Data Center revenue +77%, Networking +199%. Next Q revenue guidance was ahead of the Street as well. They also announced an additional $80B in buyback authorization and increased the dividend from $0.01 to $0.25 as they are the biggest beneficiary of the hyperscaler capex spending. CEO Jensen Huang said, “The buildout of AI factories — the largest infrastructure expansion in human history — is accelerating at extraordinary speed” and “Demand for AI infrastructure continues to expand at an unprecedented pace.”

Outside of the momentum volatility and the Iran headlines it was a somewhat quiet week. As we’re through the heart of earnings season the pace of releases has slowed dramatically. This week we started down the final stretch with the late cycle tech and retail earnings. Sticking with tech, there were a couple of software reports this week which were mixed Zoom and Workday both traded higher while Intuit got crushed after its results. The company also announced it would layoff 17% of its workforce. The software sector continued to bounce with the cybersecurity stocks once again leading to the upside. Next week is a big week of software earnings.

In general, the retail Q1 results were solid, but management teams have acknowledged that rising gas prices and the cumulative effects of sticky inflation are hurting the low-income consumer. The stock reactions have been mixed as many of the management teams have taken a cautious approach with guidance. Offprice retailers have been beneficiaries of the value-oriented consumer behavior and continued to be a positive standout (TJX/ROST). Walmart has also been a beneficiary of the environment over the last couple of years, but the stock got hit hard this week following results as Q2 guidance disappointed the street. Management suggested that tax refunds have helped to buffer some of the pain at the pump which could start to translate into a slowdown in spending during this quarter. Within the sector margins are a concern given the increasing costs, Walmart said it expected prices to increase in Q2. Its competitor on the grocery side of the business Kroger announced it was looking to cut prices on thousands of products. Consumer discretionary was one of the best sectors this week up ~2% with pretty broad-based strength. Ralph Lauren, Williams Sonoma, Deckers and Cava (helped by the MAC Desk's weekly pilgrimage) were some other upside standouts within the sector after earnings.

Healthcare was the best performing sector this week, up >3%. This has been the worst performing sector YTD and is being helped by a rebound in the medtech sector which has gotten slammed this year. The resignation of the FDA Commissioner late last week is also helping the sector. Eli Lilly, the largest component, ended the week up >5%.

Utilities and REITs also outperformed up >3% as yields pulled back. There were major M&A all-stock transactions in both sectors (NEE/D and EQR/AVB) both deals are valued at >$65B. Within Utilities the IPPs bounced back sharply after a positive regulatory update from PJM late Tuesday. Financials ended the week up ~1.5%. Investment banks outperformed with the M&A activity and building IPO pipeline. Financial data and payment processors bounced while exchanges and crypto exposed stocks ended lower.

Yesterday the administration announced it would invest $2B across 10 quantum computing companies which helped to reignite one of the popular retail thematic trades. Space stocks also trade sharply higher as optimism builds ahead of the SpaceX IPO. 

China kicked the week off with an economic data dump that was pretty weak. Retail sales, industrial production and FAI all missed estimates by a wide margin. The lone bright spot was unemployment which ticked slighly lower.

Globally, flash PMI's were a headliner this week. Manufacturing readings in the US continued to increase and beat estimates. The US data was stronger than corresponding EU and Asian data. The Production reading was the fastest in four years but Input prices surged. However, S&P noted that inventory stocking to get ahead of inflation and supply disruptions likely played a role and created some pull-forward dynamics.

Flash Services was relatively unchanged and at a more sluggish level than manufacturing, just missing estimates. Prices rose as well but at a more subdued level. From the report, "Service providers reported subdued demand reflected rising prices and uncertainty, notably among consumer-facing businesses and for exports. Service exports fell at the sharpest rate for six years."   

Housing data this week was mildly positive. The May NAHB Housing Index improved from April (from 34 to 37). Pending Homes sales rose 1.4% in April, down from March's 1.7% gain and February's 2.5% increase. NAR Chief Economist Dr. Lawrence Yun note "Buyers are coming out with cautious optimism despite increasing economic uncertainty and a slight rise in mortgage rates.”

April Housing Starts beat expectations but fell from last month, though they remained above recent levels. Single-family starts fell from 1022k to 930k. Building Permits came in better than expected and rose from last month.  

The NY Fed Services Index (Business Leaders Survey) improved from last month and reached its highest level in over a year but remained in contraction. The expectations for Business Activity rose as well and are in a modestly expansionary reading. Prices Paid were about unchanged but price expectations rose.

Treasuries/Currencies - The Treasury yield curve had a twist flattener this week as the 2y rose 5bp while the long-end fell a similar amount. Yields saw their biggest move Wed. morning, falling on reports Pakistan's army chief was heading to Iran to announce a final peace agreement. Some of that move was unwound on Friday when new reporting disputed the those earlier headlines.

Kevin Warsh was sworn in as the new Fed chair on Friday. President Trump said he wanted Kevin to be "totally independent," though some of his follow-up comments could be construed as leading the witness in my totally non-lawyer take on things. Odds for a July rate hike increased from 4% last week to just under 20% this week, and odds we see 2 hikes by December rose from 10% to 20%.

The latest FOMC minutes underscored the dissenter camp's desire to rebalance the statement language with more acknowledgement of inflation risks. That was somewhat countered by the disclosure that "Several participants indicated that, in a scenario in which the Middle East conflict was resolved soon, rate reductions would be warranted later this year”. Fed Governor Waller's speech on Friday received attention as he said would support removing the "easing bias" language in the FOMC statement, joining the dissension votes of Hammack, Kashkari and Logan at the last meeting. That helped get the 2yr yield another leg higher on Friday, above and beyond the longer-tenor moves.     

The US Dollar Index was about unchanged after a strong move higher last week, with little movement on the major crosses overall except for weakening against the pound. The index has filled about 50% of the gap down on April 8 on the ceasefire news.   

   

Global Equities - Solid gains across most geographies though China lagged.  

US markets are closed on Monday. The rest of the week will be similar to this one with late cycle/tech and retail earnings in focus. Some large software names will report - a group that remains under scrutiny for being, potentially, AI-disrupted. The main economic data comes out on Thursday including PCE, personal income/spending and durable goods orders. The Knicks could punch their ticket to the NBA Finals for the first time since 1999. Rain or shine, enjoy your long Memorial Day Weekend!

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