Equity markets recovered their poise last week, reversing some of the drop over the previous three. Better than expected results from Alphabet and Microsoft more than compensated for the macro news in the US which led to rate cut expectations being scaled back yet further and a small loss for government bonds.
Global equities ended the week up around 2.5% in both local currency and sterling terms and are now down only 1-2% from their end-March high. The UK fared relatively well with a 3.0% gain as did Emerging markets which rose 3.5% on the back of a 7% bounce in China. At a sector level, tech led the rebound just as it had led the recent decline.
Last week’s US data saw growth weaken a bit more than expected and inflation continue to come in higher than anticipated. Headline GDP growth slowed sharply in the first quarter to an annualised 1.6% from 3.4% in the fourth quarter. But the underlying picture was rather stronger with activity still expanding at a healthy pace of over 2%.
On the inflation front, the Fed’s favoured core measure was unchanged at 2.8% in March, remaining significantly above the Fed’s 2% target and reinforcing fears that its stickiness will delay any rate cuts. The market now does not see the Fed easing before November, a far cry from the hopes at the start of the year that the Fed could be starting to cut rates by now.
While the outlook for rates is always crucial for markets, just as critical at the moment have been the first quarter results for the US Magnificent Seven tech stocks. The results in truth have been a bit of a mixed bag so far with Tesla and Meta disappointing but Alphabet and Microsoft beating expectations.
Even so, the market took heart from the beats and rewarded Alphabet, which announced its first ever dividend, with a 11% rise last week. Nvidia, which doesn’t report until 22 May, was also up as much as 15% and reversed its large decline the previous week.
Overall, with around 50% of S&P 500 companies now reported, earnings are beating expectations – as they generally do – and are forecast to be up some 9% on a year earlier. While mega-cap tech is generating all of the gains this quarter, earnings growth should by year-end be much more evenly spread out across the market. This prospect, along with relatively cheap valuations, is why we continue to believe small and mid-cap stocks should fare comparatively well from here.
Outside the US, there have been a few notable developments. Firstly, the UK has been outperforming over the last month, helped by the bounce in commodity prices, and the FTSE 100 index last week broke clear of the 8000 mark tested in February last year, reaching 8180 at the time of writing.
Further afield, the yen has been proving even more of a wild card than ever. Late last week saw it drop sharply against the resurgent dollar to a new low of almost 160Y/$, prompting probable foreign exchange intervention by the Ministry of Finance and a recovery to 155Y/$ this morning. The weakness of the yen is upping the pressure on the BOJ to continue tightening policy and is also leading to the equity market underperforming in sterling terms.
As for last week’s bounce in Chinese equities, it was led by listings in Hong Kong which were buoyed by measures announced by the Chinese authorities to boost its status as an international financial centre. Since peak pessimism in early February, China has now outperformed global equities by around 12%.
This coming week, the macro highlights will be the Fed meeting on Wednesday and US payroll data on Friday. On the earnings front, the centre of attention will be the results of Amazon on Tuesday and Apple on Thursday.
Rupert Thompson – Chief Economist