U.S. equity markets continued to rebound higher last week and recoup from April’s pullback that was sparked by sticky inflation readings that indicated greater risk of interest rates being held higher for longer. Last week’s market gains were bolstered by data showing a modest slowdown in hiring and growth from red-hot levels, which increased expectations that the Fed could begin to lower rates this year with the economy still on firm footing (albeit cooling), despite the recent inflation readings. For the week, the Dow Jones led the way rising 2.2%, while the S&P 500 and Nasdaq Composite notched gains of 1.8% and 1.2%, respectively.

Last week’s higher than expected unemployment claims and sliding consumer sentiment echoed the softening but still firm labor market outlook shown in the April jobs report. Initial jobless claims rose to 231k from 209k in the week prior and surpassed the consensus forecast of 213k. Meanwhile, consumer confidence dipped to a 6-month low in the University of Michigan’s preliminary May sentiment survey. The largest factors driving the unexpected decline were concerns about worsening employment prospects and entrenched inflation. The modest weakening in labor data bears watching but it is too soon to declare a trend on this front, and the labor market and consumer balance sheets remain at healthy and supportive levels. However, rising inflation concerns are showing more legs after several months of upside surprises with consumers now expecting prices to grow 3.5% in the year ahead, a notable jump from 3.2% in the April survey.

The first quarter corporate earnings season was a bit of a mixed bag regarding the stance of U.S. consumers. While banks and consumer credit companies generally noted that overall consumer spending trends remain robust, many consumer service companies including McDonalds, Starbucks, Walt Disney Company, and AirBnB mentioned more challenging demand outlooks as consumers pushback against elevated prices and begin to pare back elevated spending on travel and dining out. Additionally, lower income consumer groups are increasingly under pressure and trading down to more affordable substitutes where available. Several prominent retailers including Walmart, Target, Home Depot, and Lowe’s will report first quarter results this week and next and provide more information on spending and where consumers may be dialing back.

As earnings season begins to wind down, overall reported sales and profits are holding up well and coming in-line with expectations at the start of the year. According to FactSet, the S&P 500 is on track to grow sales and earnings per share by 4.2% and 5.3%, respectively, compared to the first quarter a year ago. However, looking under the hood those earnings results have been significantly influenced by mega-cap technology stocks. The Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, & Tesla) are on track to notch collective EPS growth of 47.6% year-over-year (despite Tesla earnings falling 47%), while the rest of the S&P 500 excluding those companies is on track for a -2.2% year-over-year decline. The earnings growth disparity between mega-cap tech stocks and the rest of the market is expected to narrow throughout the rest of 2024.

In the week ahead, inflation will remain front and center with April’s CPI update due out tomorrow. The consensus economist forecast anticipates a slight moderation with headline CPI growing 3.4% on an annual basis from 3.5% in March and core CPI (ex-food and energy) growing 3.6%, down from 3.8% in March. Additionally, U.S. April retail sales, manufacturing production, and a host of housing market data points will round out the rest of the week.