What Happened Last Week
- Tech-Fueled Rally: U.S. markets posted their best week of the year amid a sharp snapback in tech and mega-caps.
- Strait Confusion: While talks between the U.S. and Iran did not lead to an end of the war or a complete reopening of the Strait, investors looked past the back-and-forth with an eye toward an ultimate resolution.
- Earnings Kick Off: The large banks kicked off earnings season with good reports and sanguine macro commentary.
What We’re Watching This Week
- Middle East Negotiations: Market participants are watching for some progress on talks ahead of the Wednesday expiration of the ceasefire.
- Earnings Week Two: A mix of regional banks, AI-theme winners, and the first of the Mag 7 report earnings.
- Economic Data: Updates on global growth and inflation trajectories will provide a timely read on how economies are adapting to higher energy prices.
Investment Management Team’s Views
The tech sector roared back to life last week, helping the NASDAQ 100 and S&P 500 to their best returns since last May. Importantly for market leadership, the NASDAQ made new all-time highs, finally overtaking the resistance level from last October that had weighed on the U.S. market. The returns from the prior 3 weeks (NASDAQ +15.3%, S&P 500 +11.9%) typically occur after crisis periods that have seen deep drawdowns, not the garden-variety pullback we saw in March. That suggests that positioning played a large role in the speed and scale of the recent snapback in equities, meaning we are unlikely to continue rallying at such a pace in the week ahead. But we think the market’s read of the situation – the war is not over, but the worst is behind us – seems largely correct. All parties in the war in the Middle East are showing positive signs of peace, inclining us to be aggressive buyers of dips with an eye toward the ultimate resolution of this conflict.
The price action last week was less positive than it appeared at first glance, however. Part of this is a reflection of market concentration in tech and the view that these secular growers in the AI theme had just gotten too cheap ahead of their upcoming earnings reports. But another piece of it is the uncertainty around global growth that has been spreading by the day as this conflict has dragged on. The average U.S. stock trailed the market-cap weighted S&P 500 by 1.2% last week, and international stocks, which had previously acted as the market’s favorite way to play a resolution in the conflict, lagged the domestic market by the widest margin since the first week of the war. Interest rates have also painted a less positive picture than the message from just looking at the S&P 500’s performance. We will be watching this divergence in the weeks ahead and looking for opportunities to reposition portfolios accordingly.
The week ahead will feature a mix of the macro and micro. Middle East talks and energy flows will dominate the macro conversation. Inflation readings from many developed countries will help set the tone for global interest rates, a part of the market that has not seen as sharp a recovery as equities. Retail sales in the U.S. and purchasing manager (PMI) surveys for many developed nations will provide updates on the likely trajectory of economic growth. The second week of earnings season will keep fundamentally-focused investors busy. Highlights from this week include regional banks, AI infrastructure names, and some large healthcare companies.