What happened last week
- Stocks rose for the first time in four weeks on the back of strong earnings.
- Economic data was weak, with GDP coming in softer than economist estimates and inflation printing slightly hotter.
- Despite the recent pullback in investor positioning within the AI winners, Microsoft’s and Google’s earnings reports lent strong support for the theme.
What we’re watching this week
- Macro: An FOMC meeting, the Treasury Quarterly Refunding Announcement, non-farm payroll data, the Employment Cost Index, and more.
- Earnings: Amazon (Tuesday), Apple (Thursday); ~25% S&P reporting this week, but a bigger week for small-cap earnings with ~40% of the Russell 2000 reporting.
- Geopolitics: Fading into the rearview, at least in the context of this week’s events.
Horizon’s Investment Management Views
Despite weak economic data, strong earnings (the aggregate S&P 500 earnings surprise around 9%, highest since 2021) propelled U.S. equities into the green for the first time in four weeks. The 1Q ‘24 GDP print surprised to the downside, indicating slower growth driven primarily by a large increase in imports as Core PCE inflation was higher than anticipated; our positive outlook on the consumer has not changed as a result of this print. The market reaction was fairly bearish to this data, with 10-year U.S. Treasury yields rising and stocks generally falling. Despite META’s miss on forward revenue guidance, investors bid up equities on Google and Microsoft earnings and guidance. Both outperformed expectations with Google rising double digits on Friday and Microsoft continuing to exhibit a unique capacity to monetize the generative AI trend.
All in all, the market liked earnings more than the economic data, with the S&P breaking its 3-week losing streak – we think that this is generally right and that the economic data may be an afterthought in investors’ minds in the context of continued AI-powered earnings strength, especially given YTD trends. It should be noted that the primary drivers of macro growth remain fiscal and corporate investment, particularly in manufacturing and, more specifically, in chips and AI; the revenues from cloud computing from both Google and Microsoft made this abundantly clear.
The week ahead will be busy on both the micro and macro front. On the micro side of things, around a quarter of the S&P 500 and roughly half of the Russell 2000 by market cap will be releasing first quarter earnings results. Investors will also have to process a deluge of top-tier macro releases: the May FOMC meeting, the Treasury Quarterly Refunding Announcement, April payrolls, in addition to more wage & labor market data, will provide investors with plenty of data to parse. Given the slight uptick in YTD inflation, we are closely monitoring if and how the Fed’s framework & thinking on inflation has changed.
GDP is short for gross domestic product. FOMC is the Federal Open Market Committee. The “core” PCE price index is defined as personal consumption expenditures (PCE) prices, excluding food and energy prices.
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