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Week in Review
Equity Markets:
The S&P 500 finished last week up nearly 3% and held onto its 9-day winning streak, which is the longest for the index since November 20041. The index has rallied 17% since the 4,835 low on April 7 and is currently only -4% year to date. Following the low last month, there has been a slight rotation into riskier assets, such as Large-Cap Growth, but its value peer is still outperforming for the year. The Russell 1000 Value Index is slightly positive for the year through last week, with a return of 0.47%, while its growth counterpart remains down 5.87% for the year2. Foreign investments have continued to outperform for the year. Developed international, represented by the MSCI EAFE Index, is up 6.2%, and Emerging Markets are up 3.23%.
The recent rally has not been unwarranted. Earnings results have improved over the last two weeks. So far, 72% of S&P 500 companies have reported earnings. Thus far, 76% have exceeded earnings expectations and 62% have beaten revenue estimates3. The outlook has significantly improved as well. The blended earnings growth rate for the first quarter currently sits at 12.8%3. As little as 2 weeks ago, the growth rate outlook was a modest 7%. One area of concern in our view is that valuations have pushed back to high levels. The forward four-quarter P/E is back in the 21x range4. This is a similar multiple to the index it traded at before the recent 20% decline. We believe this exposes the market’s susceptibility to further volatility and a pullback in the near term.
Earnings results have been strong, but guidance has been a weaker point. Multiple companies have expressed concern over the outlook for the remainder of the year due to uncertainty around the impacts of tariffs. This has caused forward earnings expectations to decline. The expected earnings growth for the full year 2025 has decreased by 20% and currently sits at 8.7%4. If this is the growth rate for the year, it would align with long-term historical averages. Still, we anticipate continued downgrades as the tariff policy comes to fruition and shifts away from rhetoric.
Investors should assess their current portfolios to align with their desired risk levels. If the 20% drawdown was hard to stomach, following the recent rally could be a good time to re-allocate to ensure your portfolio is appropriately positioned to withstand another bout of volatility.
Fixed Income Markets:
The Federal Reserve kept interest rates unchanged at its meeting this week. Chairman Powell acknowledged continued inflation pressures and uncertainty as to how tariffs could impact inflation going forward. The Fed remains committed to its data-driven policy approach and isn’t anticipating further rate cuts until the latter half of the year. Despite the 100 basis points of cuts in last year’s fourth quarter, the 10-year Treasury yield has risen. Following the first rate cut, the 10-year yield fell to as low as 3.6% and hit a recent peak of 4.5%. It has settled in the 4.25-4.4% range.
The Fed Fund’s Futures Market is pricing in two rate cuts for the year5, which aligns with the outlook of policymakers. This is the most likely path, barring a material breakdown in the labor market. Inflation expectations have also increased. The most recent University of Michigan Consumer Sentiment Survey showed that 1-year inflation expectations surged to 6.5%6. This could delay further rate cuts, but we see this potentially adding to fixed income market volatility. We believe peak rates have been established for this cycle. We do see the possibility of the 10-year Treasury yield pushing near the 5% range, but it will likely be short-lived. Overall, our long-term view of the fixed-income market remains positive. Given current levels in rates, we believe investors are being compensated with an acceptable long-term real rate of return.
Economic:
Last week’s labor market reports were mixed, but the Non-Farm Payrolls beat expectations handily. Weekly unemployment claims this week came in better than expected at 228,000, a decrease of 13,000 from the week prior and better than the 231,000 that was forecasted. Chairman Powell acknowledged the labor market cooling in his post-FOMC meeting press conference. The unemployment rate remains historically low at 4.2%. He expressed that the rise from the low of 3.4% two years ago was a substantial move. The labor market continues to show signs of cooling but has yet to reach a level that policymakers feel there needs to be action taken. The labor market will be a key factor we will pay close attention to moving forward. Early signs of labor market weakness could be a helpful indicator of slowing earnings growth and more volatility in the equity markets. Next week we will see timely inflation readings with CPI being released on Tuesday followed by the PPI on Thursday.
Sources:
1)JH Investments, Inc.
https://www.jhinvestments.com/weekly-market-recap#market-moving-news
2)JPMorgan Asset Management
3)FactSet Research, Inc.
4)LSEG I/B/E/S
5)CME Group
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
6)University of Michigan
https://www.sca.isr.umich.edu/
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
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