The major indexes ended with solid gains last week, with the S&P 500 posting a third straight weekly gain and Nasdaq up for a sixth straight week, matching the longest streak since December 2019 into January 2020. The S&P 500 Index reaching its highest intraday level since mid-August 2022. The rally was broad-based, with strong gains in both value and growth stocks, as well as small caps. Sectors were all higher. Treasuries were slightly firmer across the curve. The yield of the 10-year U.S. Treasury bond rose for the second week in a row, climbing to the highest level in two and a half months. The 10-year bond closed around 3.80% on Friday—up from 3.46% a couple weeks earlier, yet well below a recent peak of 4.07% on March 2.The dollar index was down, breaking a three-week streak of gains.
Companies in the S&P 500 recorded average earnings decline of 2.2% versus the same quarter a year earlier, according to FactSet data from the recently concluded earnings season. That result marked the second consecutive quarterly earnings decline. Consumer discretionary was the strongest among all 11 sectors, with earnings growth of 55%. According to FACTSET during the last two months, analysts lowered EPS estimates for the second quarter by a smaller margin than average. The Q2 bottom-up EPS estimate decreased by 2.0% (to $53.28 from $54.38). While analysts were lowering EPS estimates for the second quarter, they were also decreasing EPS estimates on average for the next two quarters. The bottom-up EPS estimate for the third quarter declined by 0.9% (to $56.37 from $56.87), while for the fourth quarter declined by 0.6% (to $58.10 from $58.43) during this same period. At the sector level, seven sectors witnessed an increase in their EPS estimate for CY 2023 Communication Services , Consumer Discretionary and Information Technology sectors had the largest increase. On the other hand, four sectors recorded a decrease in their EPS estimate for CY 2023, led by the Energy and Materials.
Growth in nonfarm payrolls gained in May, with upward revisions to the prior months. Nonfarm payrolls rose by 339,000 in May, well above expectations for a less than 200,000 reading . The increase in jobs was broad-based, with gains in both services-producing and good-producing segments. Employment in services, which is a significant for the overall job growth, rose by 257,000 in May, up from 225,000 in April. Within services, we saw robust job growth in Professional + business services, Health care + social assistance, Government and leisure and hospitality. Overall, the U.S. economy added 339,000 jobs for the month, much better than the 190,000 Dow Jones estimate and marking the 29th straight month of positive job growth. The unemployment rate rose to 3.7% in May against the estimate for 3.5%. The jobless rate was the highest since October 2022, though still near the lowest since 1969.
While the broader economy is slowing, household spending has remained robust this year despite weakness elsewhere, analysts attribute this to the strength of the labor market. Although it is expected the strength to fade over the balance of the year, we think consumers will remain well positioned to overcome the slowdown better than on a traditional recession.
The U.S. Federal Reserve’s preferred measure for tracking inflation showed that consumer prices rose at a slightly faster pace in April than in March, reversing a recent trend of inflation moderation. The Personal Consumption Expenditures Price Index rose at a 4.4% annual rate in April, up from 4.2% in March. Excluding volatile food and energy prices, core inflation rose 4.7% in April versus 4.6% in March. The labor market remains too strong. The Fed is still trying to assess the impact of cumulative rate hikes and tighter lending standards as well as the impact of a decline in bank lending to the economy. All these factors are expected to reduce credit, especially to small and medium businesses. President Joe Biden and House Speaker Kevin McCarthy finalized the bill deal to raise the debt ceiling, which easily passed the House and Senate. The restrictions on discretionary spending weren’t as bad as expected, and there weren’t any major tax increases.
At first glance, the S&P 500 has enjoyed a surprisingly robust start to the year; however, trends beneath the surface suggest more than meets the eye. So far this year, nearly 68% of the S&P 500 have had negligible or negative contributions to performance while just 14 companies have comprised what represents the entire gains for the index. Performance has largely been concentrated within the largest companies, termed "mega caps." The top 10 constituents of the index now represent nearly 35% of the index on a market cap weighted index, a historic high. In our view, this development reflects the desire for investors to gain upside potential to equities while protecting against the downside via exposure to higher-quality and profitable segments.
In euro terms, foe the week the STOXX Europe 600 Index was little changed +0.16%. The pan-European index closed with a negative sign -0.32% even though data showed that eurozone inflation had slowed, and the U.S. Senate approved a bill to suspend debt ceiling. A stagnating economy, elevated inflation, and rising interest rates weighed on the markets. Eurozone inflation slows but ECB President Christine Lagarde reiterated in a speech that inflation was still too high and “it is set to remain so for too long." She added: "That is why we have hiked rates at our fastest pace ever—and we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels." The minutes of the ECB’s May meeting showed most policymakers voted to slow the pace of rate increases to a quarter point but signaled an appetite to tighten monetary policy further.
In Asia , Japan remains the favor playground for the foreign investor. Over the week, the Nikkei 225 Index rising 1.97%, reached a 33-year high, strong domestic earnings and yen weakness along with the passage of the U.S. debt ceiling bill and the avoidance of default, as well as indications that the U.S. Federal Reserve could pause its interest rate hikes in June helped the Japanese equities.
One of the weakest spots in the global economy is China. Manufacturing Purchasing Managers’ Index (PMI) fell to a below-forecast 48.8 in May from April’s 49.2, marking the second consecutive month of contraction and the lowest reading since December 2022 and nonmanufacturing PMI also eased, falling to a weaker-than-expected 54.5 in May from 56.4 in April. Industrial profits fell 20.6% in the first four months of the year from the prior-year period, according to the National Bureau of Statistics.
We expect volatility to remain in the Equity and bond markets. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure. We’ve recently become more constructive on Developed International equities. In the United States, large-cap equities provide an attractive blend of quality, yield, and growth at a reasonable value even though earnings expectations continue to deteriorate. For fixed income, we remain defensive in our credit positioning and higher in credit quality. We expect that credit spreads will become wider to account for slowing growth and recession risks.