On Friday, the Dow Jones Industrial Average (DJIA) concluded its eighth straight day of gains, marking its best week in 2024. The index increased by 125.08 points, or 0.32%, finishing at 39,512.84. Meanwhile, the S&P 500 rose by 0.16% to close at 5,222.68, but the Nasdaq Composite declined marginally by 0.03%, ending the day at 16,340.87. For the week, the Dow experienced a 2.16% gain, its strongest since December and its fourth consecutive week of gains. Both the S&P 500 and Nasdaq Composite also ended the week positively, recording their third consecutive winning week with rises of 1.85% and 1.14%, respectively. Despite the gains, investor sentiment was tempered by new consumer sentiment data indicating a significant rise in inflation expectations. The University of Michigan’s preliminary consumer sentiment index for May registered at 67.4, substantially below the anticipated 76 from Dow Jones estimates, and hitting its lowest level in roughly six months.
For the week ahead, important economic data includes the April consumer price index (CPI) and retail sales reports scheduled for Wednesday, and the Philadelphia Fed Manufacturing Index due Thursday. In addition, several Federal Reserve officials, including Chair Powell, will speak at various events, with Powell’s appearance set for Tuesday.
Economists at Goldman Sachs anticipate a 0.28% increase in the core CPI for April on a month-to-month, seasonally adjusted basis. This rise is expected to reduce the annual inflation rate by two-tenths to 3.6%. Their forecast accounts for a 2.5% decrease in airfares and overall declines in automobile prices, with used cars falling by 0.8% and new car prices remaining steady, economists noted, citing growing inventories, mixed auction prices, and reduced incentives.
“On the positive side, we forecast another large gain in car insurance rates (+1.6% vs. +2.6% in March) based on online price data, and we assume a 2bp boost to core CPI from this year’s tax preparation price hikes (within financial services CPI),” Goldman said. “We estimate a 0.37% rise in headline CPI, reflecting higher energy (+1.7%) and food (+0.3%) prices. Our forecast is consistent with a 22bp increase in core PCE in April,” they added.
Retail in focus: Walmart, Home Depot to report this week
The first-quarter earnings season so far revealed that a significant number of S&P 500 companies surpassed both sales and earnings expectations, coupled with optimistic future guidance. In the tech sector, stronger-than-anticipated AI monetization and capital expenditure (capex) trends have bolstered the sector’s recovery, with many analysts expecting that upcoming industry conferences will further propel AI-related stocks upwards in the coming weeks. For this particular week, several earnings reports will be in the spotlight, most notably those by retail giants Home Depot and Walmart, as well as Cisco Systems. In addition, Chinese e-commerce behemoth Alibaba Holdings, Applied Materials, Under Armour, and Take-Two Interactive Software are also set to report their latest earnings in the following days.
What analysts are saying about US stocks
UBS: “Having recouped most of the loss sustained during a weak April, the S&P 500 now stands just 0.6% away from its all-time high set at the end of March. The pace and scale of further gains for equities is likely to depend on several factors, including upcoming US inflation data, signals from Fed officials, and the final stages of the first quarter reporting season. Geopolitical uncertainties in the Middle East could be another driver of markets. However, we are positive on fundamentals and see the overall risk-return outlook for equities as balanced.”
Jefferies: “AI is still early with spend to reach 25% of semi revenues by ’27 (from 5% in ’22). Cloud capex budgets are rising and the runway for growth is expanding as they do. As long as cloud providers continue to foot the bill, the AI group should continue working. We believe it’s too early to sift out winners and losers in the AI basket yet, but NVDA is our favorite.”
Goldman Sachs: “Unprofitable growth stock performance in recent years has been extremely sensitive to the path of inflation and interest rates, primarily due to their long duration profiles and need to fund operations by issuing dilutive equity, raising debt at elevated rates, or finding an acquiror. The typical stock that analysts expect to become profitable this year or next year has fallen by 4% YTD, firms expected to become profitable in 2026 have declined by 15%, and stocks forecast to turn profitable after 2026 have dropped by 28%. Unprofitable growth stock EV/Sales multiples have compressed from 14x in 2021 to 4x today, but this change appears appropriate in relationship to the shift in the interest rate environment.”
JPMorgan: “We have anticipated this year’s resilient growth and inflation persistence would narrow the window for central bank easing but the favorable financial market response to changing policy rate expectations has been a surprise. As market expectations of DM policy easing have declined by more than 50bp this year, global equity prices are at record highs. In the US, the Chicago Fed financial conditions index now stands at an easier level than when the FOMC began raising policy rates in early 2022.” “A straightforward interpretation of financial market performance is that there is more underlying strength in the global economy than had been anticipated and higher interest rates are reflecting rather than impeding global growth. We lean in this direction as our 2024 growth and policy rate forecasts both move higher.”