Strong earnings support market highs, despite ongoing oil uncertainty and mixed economic results.
With Brent crude trading at $114 per barrel and West Texas crude at $106 a barrel, and no progress opening the Strait of Hormuz, it seems hard to believe that the S&P 500 index closed over 7,200 yesterday, a record high. From a technical perspective, it marks one of the most dramatic comebacks in history. It reminds me of the COVID period in 2020, when markets declined in that three-week period as the news broke, only to roar back. That comeback was driven by stimulus, fiscal and monetary. Now, the comeback is all about broadly strong corporate earnings and AI capital expenditures (capex)—not “new” news but so spectacular in size and scope that they cannot be ignored.
As we have written before, the market waits for no one once it decides to move.
Lest you think I am going to write that the only stocks driving this market are the “Magnificent Seven,” think again. While many of those big tech and communication services companies issued blockbuster reports, there were vagaries in some of their results that had, for example, the likes of Meta taking a hit, due to spending concerns without demonstrable return on investment for its cloud business. Meanwhile, Alphabet shares surged, driven by sizzling cloud unit growth. Apple reported last night, posting 16% in services revenue growth, revealed a more positive outlook on China, and raised its dividend and announced plans to buy back more stock.
But it was the likes of Eli Lilly, Caterpillar and Qualcomm that were also in the mix, lifting animal spirits as it would seem the S&P 500 quarterly earnings may land at a stunning 15.1% overall growth rate for the quarter. For certain, tech is leading the charge there, but an overall capex binge fueled by strong earnings and cash flow and tax incentives from the One Big Beautiful Bill Act is having ripple effects, providing a foundation of stability and strength that is undeniable.
To that point, economic data continues to be mixed, but it is most decidedly not flashing recession, easing investor angst. For example, higher housing starts, solid retail sales reports and lower jobless claims are offsetting some of the poor reports on building permits, consumer confidence and inflation. The first view of first-quarter real GDP showed a 2% annualized growth rate, not unexpected, but not even close to the recession danger zone.
With that backdrop, the Federal Reserve kept rates on pause this week, leaving them in a range of 3.50% to 3.75% for the third consecutive meeting. While the Fed did not adjust the official statement to move from an easing bias to a neutral stance as of yet, several Fed officials voiced support for doing so, suggesting such an adjustment may be coming sooner than later. At the very least, the cohort of dissents sends a signal to both the market and new leadership that many agree the data does not support any additional accommodation at this point, and furthermore, any push to implement such will potentially face fierce opposition.
The most interesting part of the Fed release this week was the chance to see outgoing Fed Chair Jerome Powell have his swan song. Powell said he would keep a low profile on the board but wants to stay on until he’s convinced the administration’s criminal investigation is over. “I’m waiting for the investigation to be well and truly over with finality and transparency,” Powell said. He added his concern is about “the series of legal attacks on the Fed which threaten our ability to conduct monetary policy without considering political factors.” Powell noted, “These legal actions by the administration are unprecedented in our 113-year history and there are ongoing threats of additional such actions.”
That said, he predicted a normal transition process for Kevin Warsh.
Speaking of Warsh, he testified before the Senate this week, and kept on message with caution on near-term rate cuts given the inflation backdrop. He also reiterated his well-established criticism of the Fed’s historic willingness to intervene in markets and the economy too aggressively with its balance sheet. Now, that might not have caught the market’s eye too much, but it is important for investors to consider the incoming Fed Chair is vocally not a fan of a big Fed balance sheet or the use of monetary policy to stabilize the markets. That could spell trouble in the future, as the market often likes to rely on this so-called “Fed put” in a pinch. Remember how it saved us in 1987 with Alan Greenspan, in 2008 with Ben Bernanke and in 2020 with Powell?
In a world without the backstop of a “put” can we expect markets to keep on climbing at such a relentless pace without meaningful resets from irrational exuberance and exogenous shocks? These are the questions we are considering as this regime change occurs and will guide you to consider as we build your investment plan to meet the moment of this new world order.
Happy May Day one and all!
Written by a human.