What happened last week
- Strong end to a strong quarter with the S&P 500 closing at its highest level since last April
- Global yields rose amidst resilient economic data and hawkish central bank messaging
- U.S. banks passed the Fed’s annual stress test; reactions in bank stock were muted as questions over profitability remain
What we’re watching this week
- Friday’s non-farm payrolls release is the week’s economic highlight; job openings and weekly claims data will add context to the state of the labor market
- Price action and the potential for large moves in relatively illiquid trading
- OPEC+ meeting and events in Russia will add to the geopolitical landscape but are unlikely to have immediate market implications
Horizon’s Investment Management Views
- Most major stock indices continued to march higher last week, capping off a strong quarter in a historically strong start to the year (S&P 500 up ~17% and NASDAQ 100 up ~40% YTD). Last week’s gains were led by cyclicals, in stark contrast with the year-to-date domination of mega caps. This cyclical outperformance was primarily fueled by stronger-than-expected economic data (consumer confidence, GDP revisions, and income). Our view is that a pause in the outperformance of tech and mega caps is encouraging and healthy; we will continue to look for opportunities to increase exposure to the AI theme, which we believe to be in the very early stages.
- However, we can not overlook the impact of better economic data on the Fed and the bond market. The 2-year yield, up almost 90 bps in the second quarter, is approaching 5%, and Friday closed one strong jobs report away from the pre-SVB highs. Higher yields have yet to disrupt the strength in equities, but our sense is that this relationship is near an inflection point; from here, interest rates are likely to be a headwind for valuations, given the multiple expansion we have already seen this year. Unless trend core inflation falls quickly to around the Fed’s 2% target, we expect the upside in equities to be capped as market volatility comes off an unusually low floor in coming months.
- The upcoming holiday-shortened trading week is likely to be light, despite important labor market data releases – watch out for large moves on low volume and counterintuitive price action. Overseas, the main focus is on the OPEC+ meeting in Vienna; the market has already moved on from the events in Russia that gripped the headlines just over a week ago.
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