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WEEKLY INVESTMENT PERSPECTIVE

U.S. equity markets slid lower in last week’s holiday shortened trading week as investors continued to grapple with surging inflation data and indications of cooling economic growth. For the week, the S&P 500 fell by -2.1% while the Dow Jones and Nasdaq Composite lost -0.8% and -2.6%, respectively. Higher dividend paying stocks and cyclical sectors positively leveraged to inflation, like energy and materials, extended their year-to-date outperformance relative to high-growth technology stocks that tend to be more sensitive to rising interest rates. Meanwhile, the 10-year U.S. Treasury yield has pushed past 2.85% after starting the year at just 1.5% as the Federal Reserve communicates a swifter path to tightening in response to rising inflation concerns.

Corporate earnings season kicked off last week with mixed results among some of the largest banks and financial service companies. In general, despite the prospect of higher net interest income from rising rates, bank results fell a bit short of expectations and management teams struck a more cautious tone looking ahead. On a positive note, they indicated that corporate loan demand and consumer spending remain quite strong right now with more consumption shifting from goods towards services. However, forward looking guidance was tempered by high uncertainty from the sharp pivot in policy from the Federal Reserve and the unknown ripple effects of the Russia-Ukraine war on supply chains, commodity markets, and counterparty risk.

Overall, despite difficult year-over-year comparisons against the first quarter of last year when pandemic stimulus and the release of pent-up demand drove a surge in profits, corporate earnings broadly are expected to sustain positive growth in the first quarter, albeit more modest than last year’s growth rates. The consensus forecast for earnings growth for the S&P 500 as a whole in the first quarter is just over 5%, according to FactSet. The highest growth expectations are in the energy, industrial, and materials sectors while the consumer discretionary and financial sectors’ results are expected to recede from a year ago.

As financial conditions tighten, investors will be closely monitoring how much of rising prices corporations can pass on to consumers. Last week’s inflation data sustained its rising trajectory with consumer prices growing 8.5% year-over-year and producer prices up 11.2% year-over-year in March. Meanwhile, retail sales data in the first quarter was strong but showed slowing momentum as consumers are feeling the squeeze from inflation running beyond wage increases, rising borrowing rates, and the drop-off in stimulus support. Redfin, a real estate brokerage company, reported that 12% of home sellers on their platform cut their listing prices in the week ending April 8th, which was the sharpest increase in list price reductions since 2015 and indicates that effects of rising mortgage rates are starting to be felt.

In the week ahead, corporate earnings season will push further into focus with another 70 S&P 500 companies on the docket to report results, but market participants will continue to monitor developments on the war in Ukraine as well as the Covid lockdowns in China. According to Reuters, roughly 373 million Chinese citizens in cities accounting for 40% of China’s GDP are affected by the recent wave of lockdowns, which deals another setback to global supply chains. In Ukraine, fighting in the eastern part of the country is expected to intensify following a buildup of Russian troops and equipment. In response, the U.S. and European Union are considering further sanctions, including the potential for more bans on Russian energy out of Europe.

 

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