Despite a weaker than expected GDP report and another upside inflation surprise, a sharp rally in tech stocks lifted U.S. equity markets to the best weekly performance since last October. After shedding nearly $1 trillion in collective market value in the week prior, the “Magnificent Seven” recouped a large portion of their losses, adding back roughly $550B collectively with support from well-received earnings results from Microsoft and Alphabet that more than offset disappointing results from Meta. For the week, the S&P 500 gained 2.7%, the Nasdaq climbed 4.2%, and the Dow rose 0.7%.

U.S. real GDP growth slowed in the first quarter to its slowest pace in two years falling to just 1.6% from 3.4% in the fourth quarter. Meanwhile, inflation in the quarter came in stronger than expected as the core PCE deflator leapt to an annualized rate of 3.7% from 2.0% last quarter. The combination sparked headlines and concerns about the potential of shifting into a stagflation environment characterized by weakening economic growth coupled with stubborn and excessive inflation. However, looking under the hood at the GDP report reveals greater economic momentum than the headline figure suggests as the report was weighed down by surging imports and lower business inventory spending, which tend to be more volatile components. More importantly, consumer spending, the main U.S. growth driver, remained healthy and accelerated throughout the quarter based on monthly data and business investment was also robust. The surge in imports, while subtracting from GDP, is another sign of strength of domestic demand.

While economic momentum appears to be staying strong, yet another hot inflation data point kicks the rate cut can further down the road and points to interest rates being held higher for longer. Markets now reflect expectations for just one to two Fed rate cuts by year end versus a peak of around seven earlier this year.

Higher interest rates have begun to drag on equity markets in recent weeks, but earnings results were the larger focus last week as roughly 40% of the S&P 500 market capitalization reported results. Investors are anticipating accelerating growth in corporate profits throughout the year from last year’s meek growth amid strong economic resilience. Halfway through first quarter earnings season, corporate earnings results are shaping up roughly in-line with to a touch lighter than expectations coming into the year, according to FactSet. Aggregate earnings growth for the quarter is forecasted to finish up around 3.3% year-over-year, which is below initial expectations for 5.5% growth, though sales growth is tracking in-line with growth expectations of 4.0% year-over-year. Last week’s reports from tech giants Microsoft, Alphabet, and Meta all further revised up capital investment expectations for building out AI data centers, which drove another spike in chip stocks and other perceived AI beneficiaries.

Markets are set for another busy week ahead with 35% of the S&P 500 constituents on the docket to report results. Additionally, market participants will tune in to Jerome Powell’s press conference on Wednesday following the May Federal Reserve meeting to gauge the committee’s perspective on stubborn inflation readings and any indications to changes in policy expectations. The week will be capped off with the April U.S. jobs report on Friday. Economists polled by Bloomberg forecast that employers added roughly 250,000 jobs in April, a drop from March, but enough to keep the unemployment rate at a strong 3.8%.