What Happened Last Week
- Tech-Fueled Rally: Tech stocks drove the S&P 500 to another week of all-time highs, while most other sectors lagged.
- Warsh Moves Ahead: Kevin Warsh’s nomination is moving ahead, setting the stage for Powell’s potential final meeting as Fed Chair.
- Negotiations Continue: Investors are tuning out the headlines and focusing on resolution in the Middle East conflict, even as oil prices rose over 10% last week.
What We’re Watching This Week
- Earnings Week Three: Tech and AI are the main events in the biggest earnings week of the quarter. Energy, healthcare, and consumer-focused names will also keep analysts busy.
- Central Banks and Data: Commentary from major global central banks, including the Fed and the European Central Bank (ECB), will set the policy tone. The first look at 1Q gross domestic product (GDP) in the U.S. and Europe will reveal how the energy price spike is affecting growth.
- Middle East: Markets still assume a speedy end to the war as investors grow immune to the barrage of conflicting headlines.
Investment Management Team’s Views
The S&P 500 rallied ~0.6% to new all-time highs last week, propelled by an odd combination of only three positive sectors: tech, energy, and staples. However, this was the second consecutive week that looked less positive than it appeared by just glancing at U.S. large-caps. The average stock in the S&P 500 fell week over week, and European and domestic value stocks were under heavy selling pressure. This poor market breadth has been a feature of the April rebound. The Nasdaq-100 is up 15% this month compared with ~7% for international developed markets and less than 5% for domestic large-cap value. We think investor derisking in the AI theme in the first quarter and latent concerns about the potential for a more protracted energy shock are to blame for the market’s recent narrowness. Both of those beliefs are set to be tested soon. Five of the Mag 7 report earnings this week, and oil prices are on the rise again, up 10% last week and likely set for another leg higher after peace talks fell through over the weekend. Now nine weeks into the conflict, the odds of nonlinear supply dynamics upsetting global growth are rising.
Beyond the back and forth of Middle East headlines, macro investors will have a feast of global central bank meetings to sink their teeth into this week. In the U.S., the Fed is on hold and is likely to try to fly under the radar. That may be easier now given the strength of the recent economic data and the forward progress in Warsh’s nomination process. The international central banking calendar is more interesting, however. Officials in Japan, Europe, and the UK all meet, and while none are expected to move interest rates, their commentary will be closely watched by fixed income traders, especially since all three have a meaningful chance of hiking interest rates at their next meeting based on current market pricing. The widening gap between stocks, fully recovered, and yields, still near their post-war highs, makes for an interesting setup ahead.
The week ahead is the biggest for known market catalysts this quarter. About half of the S&P 500 by market cap report earnings this week, providing helpful fundamental commentary to contrast with the slew of macro headlines dominating markets over the past two months. Still, don’t sleep on the macro. First-quarter GDP reports in the U.S. and Europe, as well as a host of central bank meetings, will shape expectations for interest rates and offer updates on the global growth trajectory.