Broker Check

Market Insights – Week Ending June 7, 2024

June 09, 2024

Equity markets cleared new all-time highs again this week as mega-caps continued to drive index returns. Tech-centric growth stocks, particularly semi-conductors, prompted follow-through momentum from the previous week with Nvidia (NVDA) surpassing the $3 trillion market value threshold ahead of its 10-to-1 stock split on June 11. To that end, AI-enthusiasm is alive and well. Beneath this AI-led momentum is a softening economic backdrop challenging the broader market and participants’ hopes for a soft landing. Elevated inflation and interest rates remain the central themes – it’s all a balancing act. Signs of a weakening economy are a boon in terms of nudging the Fed towards cutting rates and placating the market’s soft-landing hopes; but also, a detriment if growth weakens too much, risking broader economic slowdown outside of simply lowering inflation.

Economic data was largely mixed last week - the unemployment rate for May increased to 4% from 3.9% in April with the US economy adding 272K jobs well above consensus. The takeaway being that despite a slight uptick in the unemployment rate, unemployment remains at multi-year lows with the robust job additions seen as evidence of a resilient labor market and not overly supportive of lower rates. The other major data point was the ISM manufacturing Index for May, which contracted by a larger margin than expected. The takeaway here is that a contraction in manufacturing activity is indicative of softer consumer demand – which was also highlighted in the downward revision of consumer spending in Q1 GDP, expanding 1.3% below advance estimates of 1.6%. 

So far, earnings growth and subsequent equity returns have been supported by a strong labor market and resilient consumer spending, allowing AI-induced momentum to run unabated. This has resulted in the market being led by a handful of large, growth focused companies as other areas of the broader market remain relatively muted. Economically sensitive industrials and consumer discretionary stocks have struggled as consumer demand has softened. Interestingly, more defensive sectors have also delivered relatively disappointing performance as health care stocks and consumer staples face their own set of cost-related issues. The silver lining is that selling pressure has not been robust and although other areas of the market have not seen outsized returns like the mega-caps, they also have not experienced outsized negative sentiment either. The takeaway is that a lot is riding on the outperformance of a relatively narrow range of tech-oriented companies and thus a lot is riding on the market’s overall narrative of a soft-landing and the reliance on the Fed to ‘get it right.’ Along with inflation, market participants (and the Fed) will continue to gauge economic data related to the labor market and consumer spending as it relates to the timing of rate cuts.

Week Ahead:

Market participants will face two major market moving events – Inflation for May and the Fed’s Interest Rate Decision on Wednesday. As with previous releases, the market will be looking for improvement on the inflation front along with commentary from Fed Chair Powell signaling rate cuts. The updated Summary of Economic Projections will also be released at this FOMC meeting, which will likely cause the market to  adjust economic and rate cut expectations. On the earnings front,  Oracle (ORCL), Broadcom (AVGO), and Adobe Systems (ADBE) report throughout the week.

Chart of the Week:

As the Fed prepares to meet this week, the expectation is for rates to remain unchanged at 5.5% as inflation remains elevated above the Fed's 2% target. Higher-for-longer rates have pressured equities as the Fed remains committed to bringing inflation down, but markets have largely looked past this as the notion of the interest rate cycle peaking has proven to be more important than the timing of rate cuts. 

The Fed will release the 'dot-plot,' which will project the Fed's expectations for rate cuts for the remainder of the year - widely expected to reflect one or two cuts. The European Central Bank and the Bank of Canada have both begun to pivot and cut rates. The Fed will likely follow, but the timing remains uncertain and without urgency. Still, the pivot shown by other central banks is a promising sign and indicative of a peak in global interest rates as economies work towards post-Pandemic normalization.



As always, if you have any questions or comments please do not hesitate to reach out.

 

Respectfully,

 

Michael Neill, CFA