Market Summary
US equity markets ended the week on a strong note with the S&P 500 rising 2.9%, largely recovering the losses experienced since President Trump’s ‘Liberation Day on April 2.’ Gains were supported by optimism on trade policy with China, upbeat earnings from major companies, and muted inflation data that helped offset slowing growth concerns.
On the trade front, Secretary of the Treasury, Scott Bessant, noted that hundreds of countries are approaching the US to negotiate trade deals – a figure that is likely exaggerated. Moreover, any communication between other countries and the US is likely still far away from direct tariff negotiations. Instead, the ‘negotiations’ are probably referring to the very early stages of countries simply being open to the possibility of beginning tariff talks.
China has been the focus since Liberation Day and the subsequent over-the-top retaliatory trade measures against the world’s second-largest economy. Over the last few weeks, China has disputed US claims of on-going negotiations but, recently, China has opened the door to begin trade talks with the expectation of mutual trust.
The market viewed this as a positive development. Still, Trump’s 90-day pause on country-specific tariffs looms without tangible results or clear direction forward. The takeaway is that Trump’s trade policy has at least made a U-turn from a clear path of escalation towards a more lenient, amicable stance – for now.
Earnings
A calming of trade policy angst allowed market participants a moment to focus on earnings and economic news.
On the earnings front, 72% of companies in the S&P 500 have reported with 76% of those reporting positive earnings beats (Factset).
Notably, Microsoft (MSFT) and Meta Platforms (META) posted strong reports that drove a positive bias within the broader market.
The highlight for MSFT was strong growth and guidance within its cloud segment, Azure, which demonstrated ample demand for both its AI and non-AI business. META followed Alphabet’s (GOOG) lead the prior week with significant AI-driven efficiency improvements and digital advertising growth. Like GOOG, META will likely continue to face regulatory and macro headwinds but remains well positioned for long-term growth.
Amazon (AMZN) and Apple (AAPL), on the other hand, fell short of impressing investors and saw light selling pressure, but not enough to detract from broader gains.
AMZN’s report was good, but not good enough in terms of operating income – a key metric for the company – which came in lower than expected. Still, Amazon’s cloud segment, AWS, continues to see strong growth and demand for AI-driven initiatives. Participants were pleased to learn that AMZN has not seen a negative impact from tariffs yet with continued consumer demand.
Like Amazon, Apple saw minimal impact from tariffs for this quarter but ultimately traded lower mainly due to the estimated tariff impact for the third fiscal quarter (June) at $900m. Management noted its efforts to avoid tariffs to the best of its ability and that it is difficult to forecast beyond June. Despite the tariff overhang, the company’s fundamentals remain strong with iPhone sales coming in above estimates along with most other segments performing well.
The asterisks from the relatively strong earnings season so far that forward guidance remains a question mark. It is too difficult for companies to give an accurate or reasonable outlook in response to a constantly changing tariff policy. As a result, many analysts are simply using earnings estimates that exclude the potential impact of tariffs, which could lead to catch-up revisions in the future and potentially impact valuations as prices adjust. Still, positive bias remains with the earnings story being a key driver in the recent recovery in equities.
Inflation, Jobs, & GDP
In prior updates, we commented on how a lot of market volatility was being driven primarily by sentiment and soft data (surveys), rather than hard data, which led to the market becoming oversold on a near-term basis. Economic data last week gave us the first look at initial reports for April that reflected some changes in trade policy and tariff uncertainty.
On Wednesday, the advance GDP report for the first quarter showed a -0.3% decline in quarterly growth, primarily driven by a -4.83% drop in net exports. The takeaway from the report is that a contraction was largely expected given many US companies frontrunning tariff implementation. On the consumer side, spending was slightly accelerated in response to perceived tariff expectations, as well.
US GDP Growth Rate Q1 Adv.
A decline in the Fed’s preferred gauge for inflation, the PCE Price Index, was welcomed by participants following the drop in quarterly growth. On a yearly basis, the PCE Price Index dropped to 2.3% in April from 2.7%. Excluding food and energy, the core-PCE Price Index decelerated to 2.6% from 3.0% the prior year. Core-PCE was unchanged monthly, as well.
The key point here is that, so far, tariffs have not yet prompted a significant drop in consumer spending nor a significant rise in inflation.
US PCE Price Index (year-over-year) - March 2.3%
Last week also featured April’s Employment report. The resilient labor market continues to support consumer spending and offset stagflationary concerns related to tariffs and slowing growth. The unemployment rate for April was unchanged from March at 4.2% with stable new job growth at 177K above market expectations of 130K. The strength of the labor market will remain a key consideration as the equity market continues to navigate tariff uncertainty.
US Employment Report (year-over-year) - April 4.2%
Week Ahead
This week, earnings excitement will continue throughout the month to a lesser extent than in prior weeks with the focus turning to the Fed’s interest rate decision on May 7. At this point, the Fed appears to have the green light in terms of cutting rates but upside risks to inflation given tariff uncertainty and recent verbal attacks by Trump may delay that consideration.
As always, if you have any questions or comments please do not hesitate to reach out.
Chart Sources: MFG, TradingEconomics