- Stocks close higher – The TSX and major U.S. equity indexes closed higher on Friday, with large-cap stocks trailing small- and mid-cap stocks*. Sector performance is broadly higher, with consumer discretionary and technology stocks leading to the upside*, indicating risk-on sentiment. The TSX, S&P 500 and Dow Jones Industrial Average all reached record highs on the day. In global markets, Asia was mixed, with China up on higher-than-expected exports and Japan's Nikkei index lower after hitting record highs earlier this week, while Europe was higher*. Bond yields are down modestly, with the 10-year Government of Canada yield at 3.41% and 10-year U.S. Treasury yield near 4.18%. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil and gold traded lower*.
- Wholesale inflation higher than expected: Producer price index (PPI) inflation was 2.6% annualized in June, higher than May's 2.4% and expectations for 2.3%. Core PPI, which excludes more volatile food and energy prices, rose 3.0% year-over-year, compared with the prior reading of 2.6% and consensus estimate of 2.4%*. Most of the rise was attributable to a 1.9% increase in wholesaler margins**. Investors appear to be less concerned with the wider margins, as they tend to be sustainable only when end demand is sufficiently strong, in our view. Despite the higher inflation reading, bond markets continue to price in two Fed interest-rate cuts in 2024, with the first coming at the September meeting***. We believe two Fed rate cuts are a reasonable expectation but not a certainty. While the most recent core PCE reading of 2.6% in May remains above the Fed's 2% target, we expect inflation to continue to moderate, driven by lower shelter inflation and slower wage growth. Government measures of shelter inflation, including CPI and PCE, should catch up to real-time data that show housing costs rising at a slower pace. Labor markets have also started to return to a better balance, reflected in fewer job openings and rising unemployment. The Bank of Canada should also remain on track to continue cutting rates later this year.
- Corporate earnings season kicks off: Expectations are high as companies begin reporting second-quarter results this week. Year-over-year earnings growth is estimated to be 8.8%, which would be the fastest pace since the first quarter of 2022*. Earnings growth is also expected broaden, with eight of the 11 sectors forecast to report year-over-year growth*. We believe continued broadening of earnings performance should set the stage for lagging sectors to play some catch-up to technology and communication services, which have led the market higher.
Brian Therien, CFA
Investment Strategy
Source: *FactSet ** Bureau of Labor Services *** CME FedWatch Tool
- Stocks closed mixed as technology sells off – The major averages closed mixed on Thursday, with the technology-heavy Nasdaq closing sharply lower, while the Canadian TSX and Dow Jones closed higher. There were early signals of a rotation out of the mega-cap tech darlings and into lagging areas of the market, including small-cap and cyclical sectors. This rotation emerged as U.S. consumer price index (CPI) inflation data for June came in cooler than expected. On an annual basis, headline inflation was 3.0%, below last month's 3.3% and below forecasts of 3.1%*. The monthly CPI inflation was -0.1%, the first negative reading since 2020, implying prices broadly have moved lower in June*. After inflation data was released, U.S. Treasury yields moved sharply lower across the curve, with the 2-year yield down by around 0.1% to 4.51%, a recent low*. In addition, the probability of a Fed rate cut at the September meeting also increased, now around 85% according to CME FedWatch, up from about 68% just last week**. In our view, while the lagging parts of the market are certainly ripe for a bounce back, especially versus the mega-cap technology stocks, which may be overextended, investors may need to see further economic data for a sustainable rotation to occur. If the economy softens from here, the scope for outperformance in areas like small-cap stocks and cyclical sectors may be limited, given they are more correlated to economic growth as well.
- U.S. CPI inflation comes in below expectations: For the month of June, U.S. CPI inflation was cooler than expected, supporting the narrative that the disinflation trend in the U.S. may be resuming. Headline CPI was 3.0% year-over-year, below last month's 3.3% and forecasts of 3.1%. Core CPI inflation, excluding the more volatile food and energy, was 3.3%, below last month's reading and forecasts of 3.4%*. Looking at the underlying trends, energy prices cooled this month, with gasoline prices down about 3.8%. Used vehicles also declined in June by over 1% and airline fares declined by over 5%. And shelter and rent prices, one of the key drivers of core inflation, were up by about 0.2%, the slowest pace of gains this year*. Overall, our view continues to be that inflation will likely moderate, but perhaps not in a straight line lower, and core inflation should head toward 2.5% by year-end. In this backdrop, the Federal Reserve should have more comfort in beginning a rate-cutting cycle in the second half of 2024.
- Corporate earnings season kicks off on Friday: S&P 500 earnings season will kick off in earnest on Friday, with big banks such as J.P. Morgan and Citibank reporting earnings. Investors will be listening closely for commentary around the health of the consumer and around loan growth trends for corporations and households, as well as any regional divergences. More broadly, expectations call for S&P earnings growth to rise by 8.8% year-over-year in the second quarter, the fastest pace since the first quarter of 2022*. Earnings growth is also expected to be broad, with eight of the 11 sectors forecast to report positive earnings growth*. In our view, market returns this year will be driven more so by positive earnings growth than valuation expansion, which was a primary driver of market returns last year. We believe the continued broadening of earnings performance should support the lagging sectors to play some catch-up to technology and communication services, which have led the market higher.
Mona Mahajan
Investment Strategist
Source: *FactSet ** CME FedWatch Tool
- Stocks close higher – The TSX and major U.S. equity indexes closed higher on Wednesday, with large-cap stocks leading small- and mid-cap stocks*. The S&P 500 and Nasdaq Composite both reached new all-time highs. Sector performance was broad, with technology and materials leading to the upside*. In global markets, Asia was mixed, with Japan's Nikkei index closing at a new high*. European markets rose, as concerns over divided government in France eased following elections. Bond yields were lower, with the 10-year Government of Canada yield at 3.47% and the 10-year U.S. Treasury yield near 4.28%. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil and gold both traded higher*.
- Focus on inflation: Inflation will be front and center for markets this week, with the release of consumer price index (CPI) inflation for June out Thursday. Expectations are for headline CPI to moderate to 3.1% on a year-over-year basis, down from 3.3% in May. Core CPI, which excludes food and energy prices, is forecast to remain unchanged at a 3.4% annual rate*. After a choppy start to the year that saw higher-than-expected inflation in the first three months, inflation has resumed its downward trend in recent months. Bond markets are pricing in two Fed interest-rate cuts in 2024, with the first coming at the September meeting**. We believe two Fed rate cuts are a reasonable expectation but not a certainty. While the most recent core PCE reading of 2.6% in May remains above the Fed's 2% target, we expect inflation to continue to moderate, driven by lower shelter inflation and slower wage growth. Government measures of shelter inflation, including CPI and PCE, should catch up to market-based measures that show housing costs rising at a slower pace. Labor markets have also started to return to a better balance, reflected in fewer job openings and rising unemployment. The Bank of Canada should also be able to continue rate cuts later this year as CPI gradually moderates.
- Corporate earnings season kicks off: Expectations are high as companies begin reporting second-quarter results this week. Year-over-year earnings growth is estimated to be 8.8%, which would be the fastest pace since the first quarter of 2022*. Earnings growth is also expected to be broad, with eight of the 11 sectors forecast to report year-over-year growth*. We believe the continued broadening of earnings performance should allow lagging sectors to catch up to technology and communication services, which have led the market higher.
Brian Therien, CFA
Investment Strategy
Source: *FactSet ** CME FedWatch Tool
- Stocks finish mixed: Stocks finished mixed on Tuesday, with the S&P 500 logging a modest 0.1% gain while the TSX lagged, declining by 0.4%, driven by weakness in the materials and energy sectors.* Overseas, Asian markets were mostly higher overnight, led by Japan's Nikkei, which gained nearly 2%, surging to another all-time high. On the macroeconomic front, the U.S. NFIB Small Business Index moved higher to 91.5, good for the highest reading of the year. However, today's reading was the 30th consecutive month below the 30-year average of roughly 98, signaling that small-business optimism is improving but from low levels.* Additionally, Fed Chair Jerome Powell testified before the U.S. Senate Banking Committee today. There were no surprises in today's testimony, with Chair Powell reiterating that the Fed will need to see more good inflation data before gaining the confidence to cut rates. Bond yields ticked modestly higher, with the 10-year GoC yield rising 0.03 percentage points to 3.49%.*
- U.S. inflation and its implications on monetary policy are in focus for markets: Inflation will be front and centre for markets this week, with the release of U.S. consumer price index (CPI) inflation for June out Thursday. Expectations are for headline CPI to rise by 0.1% for the month and 3.1% on a year-over-year basis, while core CPI is expected to rise 0.2% for the month and remain unchanged at 3.4% on a year-over-year basis.* After a choppy start to the year that saw higher-than-expected inflation in the U.S. for the first three months, inflation has resumed its downward trend in recent months. The 3.4% year-over-year rise in May core CPI was the lowest reading since April 2021. In response to lower inflation and data out last week that showed labour-market conditions are easing, markets are now expecting two Fed interest-rate cuts in 2024, with the first coming at the September meeting.* We believe two Fed rate cuts are a reasonable expectation but far from a certainty. In our view, the Fed will likely need to see further moderation in inflation in the months ahead before gaining the confidence to cut rates. Looking ahead, next week will provide a read on domestic inflation trends, with June CPI out on July 16.
- Stocks have historically fared well following strong first halves: The S&P 500 posted a strong first half of the year, gaining over 15% in the first six months, good for the third best start to a year since 1999.** Looking back to 1970, there have been 13 years outside of this year where stocks have gained over 15% in the first half. Encouragingly, returns were generally strong in the second half of the year as well, with returns positive in the second half of the year 10 out of 13 times, with an average second-half gain of 5.6%. More recently, returns have been especially strong in the second half following a 15% gain, with returns positive in each of the past seven occurrences, with an average second-half gain of 11.1%. While there is no guarantee history will repeat itself in 2024, we believe that this should give investors confidence that stocks can continue to perform well after a strong first half of the year.
Brock Weimer, CFA
Associate Analyst
Source: *FactSet **Morningstar Direct and Edward Jones. S&P 500 Total Return Index, returns in USD.