Stocks are set to close higher this week, with the major indexes finishing up 1.30% to 1.50%. For the month the news gets even better with the Nasdaq shooting up 15% while the S&P 500 and Dow Jones Industrial Average finished up 10% and 7%, respectively. Turns out April was the best month for stocks since the November 2020 pandemic recovery. And before you say it’s just the tech stocks again, the rally includes the Russell 2000, which is the primary index used to track small-cap companies. The bottom line is that strong corporate earnings and renewed confidence in artificial intelligence overcame persistent concerns regarding high interest rates, inflation, and geopolitical conflicts.
Perhaps the most important news this week came from the Federal Reserve (Fed), which voted to keep interest rates steady at 3.5% to 3.75%. While this doesn’t come as a surprise, it is an indication that the Fed remains stuck on the direction of inflation. To be clear, inflation is heading higher with the Core Personal Consumption Expenditures (PCE) index rising to 3.2% y/y in March. This comes a few weeks after the Consumer Price Index (CPI) reported annual inflation had jumped to 3.3% in March. While these aren’t big increases, they are far above the Fed’s 2% mandate and slowly moving in the wrong direction.
In other news, tariff refunds have started to go out and no, you should not expect any money back. The refunds are being given to the companies that imported goods and paid the tariffs, even if we know that consumers were the ones that really paid the price. It should be interesting to see how this plays out regarding earnings in the coming quarter. Some of the largest beneficiaries include Walmart ($10.2B), Target ($2.2B), and Nike ($1.0B). UPS & FedEx are expected to receive a combined $5B and other retailers like Kohl’s, Gap, and Macy’s should each receive between $300M and $500M. Some companies are booking tariff refunds in Q1 earnings, such as General Motors, which is expected to receive $500 million, resulting in a rather large earnings beat. I mention this to highlight that Q1 earnings may be skewed due to these tariff refunds.
Regarding earnings announcements, this was a very busy week. Approximately 33% of companies in the S&P 500 reported in just the last five days and earnings have proven to be exceptionally robust. The S&P 500 is on track for 27% y/y profit growth, which represents the strongest quarterly performance since Q4 2021. Furthermore, 84% of reported companies have beaten earnings expectations, well above the historical 10-year average of 76%. And it’s not just earnings. Profit margins are also widening with the net profit margin for the index tracking at 13.4%. If this holds, it will be the highest margin ever recorded by FactSet since it began tracking the metric in 2009.
As for the elephant in the room, there does not seem to be any movement on the closure of the Strait of Hormuz or its blockade. Peace talks broke down last weekend and appear to have gone no further this week. Worth noting is that as of yesterday, the U.S. reportedly delivered approximately 6,500 tons of munitions and military equipment to Israel within a single 24-hour period. I don’t have any more information that is being reported, but this does not appear to be a great development.
In closing, a record was broken this week that was thought to be impossible. The sub-2-hour marathon, for most of the 20th and early 21st centuries, was considered physically impossible by many experts and comparable to the four-minute mile. That is to say, no one thought that it was possible. On April 26th, Kenya’s Sabastian Sawe shattered the official world record by finishing the London Marathon in 1:59:30. He achieved an average pace of roughly 4 minutes and 34 seconds per mile over 26.2 miles. Now you know.
Bruce J. Mason, MBA
