Market Summary

Despite continued solid corporate earnings results and first quarter GDP growth in excess of expectations at 2.3% year-over-year, U.S. equities ended last week slightly below even. For the week, the Dow Jones Industrial Average fell 0.6% and the Nasdaq lost 0.4%, while the S&P 500 was down just 0.01%. Earlier in the week, the 10-year Treasury yield picked up to over 3.0%, which weighed on the stock market due to the prospect of higher borrowing costs and more attractive bond yields. However, the rising long-term rates also indicate that investors are less concerned that the economy will remain stuck in a rut of weak growth and inflation and provide further room to the Fed in pursuing normalization. The 10-year Treasury closed out on Friday at 2.96%.

Regarding corporate earnings, there were high expectations going into Q1 2018 earnings season driven by tax reform, which gave stocks a high hurdle to clear. To date, stocks are flying over that hurdle. Of the 154 S&P 500 companies that have reported results so far, earnings are up over 25% from the same period last year on 10% higher revenues. While there were initial concerns that S&P 500 companies had a high probability to disappoint, a solid 80% have beat EPS estimates and 72% have beat revenue estimates. On the whole, 1Q 2018 is expected to mark the highest quarterly earnings growth rate in 7 years with total earnings up 20% from 1Q 2017 on 8% higher revenues.

This last week also featured some notable corporate merger & acquisition activity, including an agreed upon merger between T-Mobile and Sprint valued at $26.5 billion, as the two companies seek to increase scale against larger competitors, Verizon and AT&T. The deal will face significant anti-trust scrutiny from a Justice Department already challenging AT&T’s acquisition of Time Warner.

Geopolitical tensions eased slightly after North Korean leader Kim Jong-un and South Korean President Moon Jae-in agreed to end a seven-decade war and pursue the complete denuclearization of the peninsula. Investors have paid close attention as South Korea is critical to the global supply chain and many manufacturers are located close to the border.

Investors will have plenty to digest in the coming week, with Apple earnings, a Fed meeting and China trade talks all on the docket.

Economic Highlights

• Inflation: U.S. headline personal consumption expenditures (PCE) rose by 2.0% year-over-year (core PCE rose 1.9% YoY), thus finally hitting the Fed’s inflation target. The index had been below the 2% target since July 2012 due to tepid economic growth. Federal Reserve members have indicated that they will likely continue with their plan for gradual rate hikes, rather than accelerating the path, even if inflation runs above the target in the near term.
• Growth: US GDP for 1Q 2018 grew at an annualized rate of 2.3%, which was above expectations of 2.0% but a decline from the prior quarter’s reading of 2.9%. Decelerating growth in consumer spending, at +1.1%—which represented the smallest increase in almost five years—offset robust business investment (+6.1%) and a rise in US exports. The declining pace of consumer spending, which accounts for over two thirds of GDP, has largely been attributed to the abnormally high consumption in 4Q 2017 and heavy winter storms in 1Q 2018; many economists expect a rebound in consumption this quarter as consumer confidence remains high and personal tax savings may drive further spending.
• Consumer Sentiment: The University of Michigan Consumer Sentiment Survey slipped to 98.8 in April from 101.4 in March, but remains high compared to historical levels. The lowered reading reflects the public’s rising apprehension to the trade conflict with China and higher interest rates.

US Economy - The Week Ahead

Tuesday, 5/1/2018

 ISM Manufacturing PMI – Consensus Estimate: 58.3 (-1.7% MoM), Prior Month: 59.3 (-2.5% MoM)
Construction Spending (MoM) – Consensus Estimate: 0.5%, Prior Month: 0.1%

Wednesday, 5/2/2018

Federal Open Market Committee (FOMC) Meeting
ADP Employment Change – Consensus Estimate: 200,000, Prior Month: 241,000

Thursday, 5/3/2018

Initial Jobless Claims – Consensus Estimate: 225,000 (7.7% MoM), Prior Week: 209,000 (-10.3% MoM)
ISM Non-Manufacturing PMI – Consensus Estimate: 58.0 (-1.4% MoM), Prior Month: 58.8 (-1.2% MoM)
Trade Balance – Consensus Estimate: -$53.5 billion (7.1% MoM), Prior Month: -$57.6 billion (-1.6% MoM)
Factory Orders (MoM) – Consensus Estimate: 1.4%, Prior Month: 1.2%

Friday, 5/4/2018

US Unemployment – Consensus Estimate: 4.0%, Prior Month: 4.1%
Nonfarm Payroll Employment – Consensus Estimate: 185,000, Prior Month: 103,000