The WMA Weekly Market Wrap v. 180501

May 1, 2018

Mostly Flat

The major domestic equity benchmarks were mostly flat last week as traders reacted to the heaviest flow of earnings reports of the season. Of the companies in the S&P 500, 168 companies representing 42 percent of its market capitalization reported first-quarter earnings last week. The utilities and real estate sectors outperformed, while industrials performed worst. Stocks suffered most of their declines for the week on Tuesday, driven in part by a plunge in Caterpillar shares after officials at the industrial equipment giant cautioned that profits may have reached a “high-water mark for the year.” 3M also fell sharply on a lower profit outlook. The two stocks’ declines weighed particularly heavily on the narrowly focused Dow given their heavy weighting in that index. Traders seemed to be concerned that higher input costs, the tight labor market, and more aggressive plant and equipment investment might also be resulting in peak profit margins.

Despite fears about future profit momentum, the strong current earnings environment provided support to the market during the week. Thursday brought the week’s best daily performance after Facebook shares recouped some of their recent losses and soared over 9 percent following the release of revenues and profits that easily beat estimates. Fellow internet giant Amazon gained nearly 4 percent following its earnings beat. By the end of the week, analysts polled by data and analytics firm FactSet were expecting first-quarter earnings for the S&P 500 as a whole to have expanded by over 23 percent on a year-over-year basis. Analysts at Thomson Reuters were even more bullish, anticipating that earnings would grow by nearly 25 percent, led by energy and tech firms.

Having reached new multiyear highs at midweek (the benchmark 10-year U.S. Treasury note’s exceeded 3 percent), longer-term U.S. Treasury yields fell back on Thursday and Friday and ended the week roughly unchanged. Traders pointed to signs of inflation as one factor behind the yield gain, particularly rising prices for commodities, including oil, and trade tensions with China. Inflation threatens the value of bonds by eroding the purchasing power of their fixed payments. That could spur the Federal Reserve to raise interest rates. Indeed, traders are increasingly betting that the Fed is preparing to raise rates four times this year, more than the three that officials initially penciled in at recent meetings.

European stocks broadly gained as investors digested a flood of corporate earnings and welcomed a seemingly dovish monetary policy statement from the European Central Bank. In the eurozone, Germany’s exporter-heavy DAX 30 lagged the broad European region, while France’s CAC 40 outperformed. French President Emmanuel Macron visited Washington, D.C., where he displayed a friendly relationship with U.S. President Donald Trump but criticized protectionist trade policies in an address to a joint session of Congress. German Chancellor Angela Merkel met with President Trump on Friday in Washington, where the two also discussed trade policy.

After the release of about one-third of quarterly European corporate earnings reports, the market seemed to be interpreting the results positively, although there was substantial dispersion of results within sectors. Traders appeared more willing to shrug off disappointing results from individual companies as sentiment improved toward the end of the week.

In Asia, trade relations between the U.S. and China remained at a low boil as officials from both sides worked behind the scenes to resolve their respective tariff threats. Nevertheless, the threat of an all-out trade war still loomed in the background at the International Monetary Fund’s annual spring meeting in Washington, D.C., where the U.S.-China trade spat was cited as a risk to global economic growth. Elsewhere in the east, Japanese stocks rallied for a fifth consecutive week.

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