Stocks closed higher in April, adding to their year-to-date gains and beginning the second quarter positively. But directional drivers for stocks were largely absent during the month. The S&P 500 Index moved 1.0% or more in either direction on only three trading days in April, with two of those days happening last week. In addition, the CBOE VIX Index, which measures the forward volatility of the S&P 500, fell to the lowest levels since November 2021. At the same time, sector performance was relatively concentrated last month, with cyclical and defensive sectors outperforming. In our view, this helps support the idea that there’s likely some room for security selection to play a role in portfolio construction, particularly in a market environment where directional drivers are weak.
The S&P 500 Index rose +1.5% in April but notched a big chunk of those gains in the final trading days of the month. The value-focused Dow Jones Industrials Average rose +2.5% last month, while the NASDAQ Composite was flat. The Russell 2000 Index lost 1.9% in April. Communication Services, Consumer Staples, Energy, Financials, and Healthcare all returned around +3.0% last month, while Industrials and Consumer Discretionary lost about 1.0%.
On the week, the S&P 500 Index and Dow Jones Industrials Average each rose less than +1.0%, shaking off last week’s decline, while the NASDAQ Composite rose +1.3%. Year-to-date, the S&P 500 is higher by +8.6%, while the NASDAQ has increased by an impressive +16.8% this year. In addition, the Dow (+2.9%) and the Russell 2000 Index (+0.4%), which measures domestic small-cap stocks, have materially trailed indexes with heavier concentrations to large-cap tech/tech-related companies.
Outside of stocks, U.S. Treasury prices firmed last month, with the 2-year Treasury yield dropping to as low as 3.85% last week before finishing the month of April just above 4.00%. Notably, the 10-year Treasury yield finished the month of April essentially where it started, ending the month at 3.45% as longer-term growth and inflation expectations remained largely anchored to historical trends. Likewise, Gold ended April higher by +0.6%, settling at $1,997.40 per ounce, while West Texas Intermediate (WTI) crude prices rose +1.5%, finishing April at $76.70 per barrel. And last but not least, the U.S. Dollar Index lost 0.9% last month, seeing a modest slowdown from its more aggressive slide in March and against a basket of other developed country currencies.
Better-than-Average Earnings Fuel Market Movement; Big Tech Cautiously Optimistic
From a market perspective, helping to shape the month of April was the better-than-feared earnings reports from the money center/regional banks and last week’s solid profit results from a few of Big Tech’s heavyweights. Big money center banks reported generally strong Q1 profit results, with some seeing an uptick in deposit growth. Minimal increases in default rates, resilient loan growth, and better-than-feared deposit trends helped shape the overall story from mid-sized banks in Q1. As a result, investors breathed a sigh of relief that conditions across the banking sector may not be as bad as feared in March. However, First Republic’s Q1 earnings report last week showed a massive loss in deposits. This reignited banking concerns across smaller/regional institutions as April came to a close, sending First Republic’s stock into a death spiral last week, ultimately ending with the FDIC seizing the bank and JPMorgan assuming First Republic’s roughly $92 billion in deposits and substantially all of its assets. On a related note, the Federal Reserve released its assessment of the collapse of Silicon Valley Bank in March. The Fed report pointed to massive management and supervisory failures, textbook missteps at managing interest rate risk, a frenzied social media blitz that compounded the run on the bank, and criticism of regulators.
Bottom line: Investors should expect increased regulations on smaller banks over time, which likely will result in higher capital requirements, lower profits, and possibly less lending among smaller-sized banks across the country. Over the near-term, bank stocks may continue to see periods of stress. But it should be noted that headline issues facing a few smaller banks are not endemic to the entire industry. The large money center banks, as well as the larger mid-sized banks, which provide significant lending and banking needs for the country in aggregate, remain well-capitalized and positioned to weather additional stress, in our view.      
Conversely, the story from Big Tech last week was cautiously optimistic. Microsoft and Alphabet generally beat lowered profit estimates helping the stocks finish the week higher. Microsoft provided better-than-feared results/outlooks on cloud computing trends, with Alphabet showing a rebound in ad revenue. Meta posted a solid earnings beat across the board, with higher engagement in Reels and AI helping drive Q1 results. And while Amazon beat first quarter estimates, driven by its cloud computing services, the company noted a slowdown in AWS during April. Overall, Big Tech earnings last week exceeded lowered expectations, and the outlooks from companies didn’t paint a picture of a substantial loss in momentum. That appeared enough to satisfy investors for now and, in combination, with Visa’s earnings report last week that pointed to a resilient consumer still willing to spend.
By the end of last week, 53% of S&P 500 Q1’23 earnings reports were complete. As a result, the blended earnings per share (EPS) growth rate is down 3.7% year-over-year on revenue growth of +2.9%. Nevertheless, results are coming in substantially ahead of the 6.7% decline expected at the end of the quarter. Moreover, with last week’s generally better-than-expected results out of Big Tech, 79% of S&P 500 companies have surpassed EPS estimates for the quarter, above the one-year average of 73% and the five-year average of 77%. According to FactSet, companies are reporting earnings roughly +7.0% above expectations — better than the +2.8% one-year average surprise rate but below the five-year average of +8.4%. Overall, S&P 500 companies have pointed to “normalization trends” as opposed to a more aggressive slowdown as well as highlighting cost-cutting and efficiency initiatives to help protect profit margins. In our view, this has helped quell investors’ worst fears regarding a more aggressive decline in Q1 profit growth or a material slide in Q2 outlooks.
GDP Data Shows Growth Slowed; Investors Await This Week’s Fed Meeting
Other items of note last week included a Q1 U.S. GDP report that showed growth slowed to +1.1% quarter-over-quarter annualized from the +2.6% pace in Q4’22. A looming debt ceiling debate could intensify after the GOP-led House narrowly passed a proposal to raise the debt ceiling limit into 2024 in exchange for roughly $4.5 trillion in spending concessions played in the background. To be clear, the House bill has zero shot at passing the Democratic-led Senate but could put more urgency behind discussions with the White House. Congressional Budget Office estimates suggest the U.S. government could exhaust its extraordinary measures to keep paying its bills by June and July. Also, the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed no change in March, with the core figure rising +4.6% year-over-year and matching February’s level.  
That brings us to this week’s highly anticipated Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday. The Fed is widely expected to lift its target rate by another 25 basis points on Wednesday. However, we expect Fed Chair Powell and company may disappoint investors hoping for a definitive answer on if May’s rate hike will be the last for this cycle. On a positive note, the Fed could press into statement language highlighting slowing inflation, pointing to rate hikes having their intended effect on moderating demand. This may even include hints that the committee would be willing to pause rate hikes should conditions warrant. However, we suspect officials, including Mr. Powell, will use Wednesday as an opportunity to maintain optionality around policy and reiterate the committee’s standing message that inflation remains stubbornly high, the Fed’s job is not done, and the FOMC remains willing to press rates higher to crush inflation. How investors respond to this two-pronged message will likely play a key role in shaping stock direction this week.
Finally, stocks will react to a barrage of earnings reports this week and economic data that should continue to color the investing backdrop for Q2. Over 160 S&P 500 companies are scheduled to report their Q1 earnings results, with Apple’s report on Thursday (the world's largest company) expected to receive outsized market attention. April ISM manufacturing and services reports (Monday and Wednesday), the March JOLTS report (Tuesday), and the April private ADP report (Wednesday) all lead into Friday’s April nonfarm payrolls report. FactSet estimates call for April job growth to slow to +185,000 from +236,000 in March, with the unemployment rate ticking up to 3.6% from 3.5%. Solid employment trends over recent months have played a key role in helping the bulls keep the soft-landing narrative for the economy alive. This week’s employment data will likely be closely scrutinized to see if soft-landing scenarios still have a place in the economic discussion. 
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