S&P 500 extends winning streak as markets brace for CPI

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After dropping in April, the markets have bounced back so far in May. The major market indexes all rose last week, making it the third-straight week of gains.

The S&P 500 climbed 1.8% for the week to 5,223 while the Dow Jones Industrial Average rose 1.7% to 39,513. Meanwhile, the Nasdaq Composite jumped 1.1% to 16,341, and the Russell 2000 increased 1.2% to 2,060.

So far through the close of the market on Friday, the S&P 500 is up 3.8% in May and 9.6% year to date (YTD). Let’s take a look at the factors that drove the markets higher last week.

Earnings have been strong

Last week’s market gains were likely related to two broad themes. First, earnings results continue to be strong for the quarter that ended March 31. According to FactSet, some 77% of companies that have reported so far have topped estimates, beating the consensus numbers by an average of 7.5%. Both of these numbers are above ten-year averages.

FactSet also found that the year-over-year earnings growth rate for this last quarter is 5.4%, the highest since the second quarter of 2022. The biggest contributors to earnings growth in Q1 were the Magnificent Seven companies, namely, NVIDIA, Microsoft, Amazon, Alphabet and Meta Platforms. Without their results, there would be an overall earnings decline of 2.4% in Q1.

Further, FactSet posted positive news about Q2 earnings, as analysts increased their estimates for Q2 by 0.7% in April. That is unusual for the first month of a quarter. Over the past 80 months, the first month of a quarter typically sees a 1.8% average decline in estimates. In fact, this is the first time since Q4 2021 that earnings estimates have increased overall in the first month of a quarter.

In addition, FactSet reported that analysts expect earnings growth rates of 9.6%, 8.4%, and 17.1%, respectively, for the second, third and fourth quarters of 2024. Further, they project 11% year-over-year earnings growth for all of 2024.

Perceptions of a weakening economy

The second factor that drove last week’s market gains is a perceived economic slowdown based on some key indicators. Last week, the federal government reported that jobless claims had increased at a higher-than-anticipated rate

This followed the April unemployment report, which came in softer than expected. The April jobs report released on May 3 revealed that fewer jobs than projected were created in April, and the unemployment rate ticked up to 3.9%.

Also last week, the University of Michigan’s consumer sentiment index fell 13%, dropping to its lowest level since November 2023.

All of these data points suggest the economy may be slowing, which may have offered some hope to investors that we could soon see lower inflation — eventually leading to interest-rate cuts.

CPI inflation report set to come out this week

This week, the big news will be the Consumer Price Index (CPI), which is due to come out on Wednesday. After the CPI rose the past two months, investors will be watching closely what this key inflation gauge says for April. With the jobs market and consumer sentiment cooling, many are hoping that the inflation rate will tick back down for April.

The markets will most certainly react one way or the other, depending on where the numbers come in. If inflation starts moving back down, it will rekindle hopes for interest-rate cuts sooner rather than later. On the other hand, if the CPI moves sideways or increases, it would dampen expectations that the Federal Reserve will cut interest rates anytime soon.