The recent performance of the U.S. stock market has seen a notable rebound driven by a robust earnings season, particularly in the tech industry. After experiencing its first significant dip of 2024, the market’s resurgence has been fueled by impressive reports from industry giants. However, the trajectory of the market in the coming weeks hinges significantly on forthcoming inflation data.
The S&P 500 index has surged by over 9% since the beginning of the year, nearing its late-March record high, subsequent to a 5% decline witnessed last month. This resurgence aligns with a stronger-than-anticipated first-quarter reporting season for U.S. companies. With a substantial majority of the S&P 500 having disclosed their results, companies are on pace to achieve a 7.8% increase in earnings, surpassing the initial April estimate of 5.1% growth, as reported by LSEG IBES.
Despite these positive indicators, concerns persist among investors regarding the potential stall of the market rally in the absence of evidence indicating a cooling of inflation. While Federal Reserve Chairman Jerome Powell has provided reassurances that the central bank is unlikely to raise rates in the near term, sustained inflationary pressures have raised apprehensions that policy adjustments may be imminent.
Art Hogan, chief market strategist at B Riley Wealth, highlighted the significance of inflation trends, stating, “the trajectory of inflation is always going to be important to us while we’re in a cycle where we expect the next thing for the Fed to do is to cut rates.” Recent market pivots have been closely associated with inflation reports, particularly as the Fed has responded with interest rate adjustments to address consumer inflation concerns.
Looking ahead, economists surveyed by Reuters anticipate the consumer price index report on May 15 to reveal a 0.3% increase in April from the previous month. Additionally, investors await crucial data on retail sales, as well as earnings reports from industry giants such as Walmart, Home Depot, and Cisco.
Matthew Miskin, co-chief investment strategist with John Hancock Investment Management, emphasized the potential impact of the CPI report on market dynamics, suggesting that a higher-than-expected reading could eliminate the possibility of rate cuts for the remainder of 2024 and necessitate discussions around more restrictive policies.
Despite these uncertainties, bullish sentiment has been bolstered by a robust earnings season, particularly notable among tech industry leaders. Companies like Alphabet and Apple have exceeded expectations, with Alphabet even announcing its first dividend. Furthermore, with Nvidia set to report soon, quarterly earnings for the tech sector are projected to increase by 49.4%.
Analysts have also expressed growing optimism regarding the financial prospects of megacap companies, with earnings estimates for 2024 showing a significant uptick. However, companies that have fallen short of expectations have faced market repercussions, underperforming in comparison to the broader market.
In conclusion, while the recent market rebound has been buoyed by strong earnings and positive sentiment, ongoing inflation concerns loom large, leaving investors cautious amidst the uncertainty of future policy actions and economic trends.
