Stocks and bonds both saw gains last week, continuing a strong rally that began in mid-April. The S&P 500 rose by 1.6%, reaching a new all-time high. The Magnificent 7, which includes companies like Microsoft, Meta Platforms, Amazon, and Apple, outperformed last week and have seen an 11.3% increase since April 19. The S&P 500 has also risen by 6.8% during this period.
One notable trend contributing to the market rally has been the decline in U.S. Treasury yields, with the 10-year and 2-year yields dropping to 4.4% and 4.8% respectively. Despite the Bloomberg U.S. Aggregate Bond index still showing a negative year-to-date return, it has appreciated by 1.8% since mid-April. Small-capitalization stocks, which are more economically sensitive, have also seen improved performance, outperforming the S&P 500 with a 7.7% return.
Estimates for U.S. economic growth remain positive, with some easing in inflation concerns while corporate earnings estimates remain unchanged. Consensus 2025 earnings estimates for the S&P 500 have continued to trend upward, keeping stock valuations lower than previous levels despite the rally in stocks.
Recent data has provided relief after higher-than-expected consumer inflation readings, particularly in the areas of rent inflation. The April CPI showed a decline in the year-over-year pace to 3.4%, with the supercore measure of services inflation ticking up to 4.9%. While progress has been made in the fight against inflation, it is clear that the battle is not yet decisively won.
Market reactions to the more favorable inflation data and softer economic growth expectations have led to an 82% chance of a Federal Reserve easing in September, with expectations for interest rate cuts in June or July. Fed Fund futures are anticipating two cuts of 25 basis points in 2024. The recent market rally has been driven by optimism around the Fed’s ability to respond to economic softness rather than inflation concerns.
While the market is currently viewing a potential economic soft landing favorably, the sharp rally in stocks and increased expectations do pose a risk if there are disappointments. This week will see several significant retailers reporting earnings, providing further insight into consumer trends. It will be important to monitor any signs of weakness in lower-income consumers and whether higher-income consumers are adjusting their spending habits, as seen with Walmart.
