Earnings Season Signals Strength Beneath Market Volatility

After a five week losing streak, US stocks finished higher for the second consecutive week. The S&P 500 gained 3.56% and sits just 2% below its all-time high from late January. Growth sectors, like consumer discretionary and technology, were the outperformers, with the tech-heavy Nasdaq rising 4.68%. 

Energy was the worst sector last week, and the only negative sector, falling 4.07% as oil plunged 13.8% for its largest weekly decline since 2022. A majority of it happened Wednesday when oil fell 16.4% which was the largest daily decline since the pandemic April 2020.

The large moves came after what appeared to be a de-escalation in the war in Iran. It went almost to Trump’s 8pm Tuesday deadline before Pakistan officials helped mediate a ceasefire agreement between the US and Iran after Trump said Iran’s 10 point plans was a workable basis on which to negotiate. In return Iran said it would open the Strait of Hormuz, where hundreds of ships are waiting to safely pass. UBS notes that there are 172M barrels of oil and products on the water in the Gulf on 187 tankers. The Strait ultimately never fully reopened.

After Israeli airstrikes on Lebanon soon after, Iran said it was closing the Strait again. However, the US sent representatives, including VP Vance, to Pakistan to discuss a solution to the war. The situation remains very fluid and additional volatility should be expected. The meetings ended with no deal and the two-week ceasefire in doubt as Vance said 21 hours of negotiations saw too large of differences to be bridged. As of Monday morning, the US is preparing for a naval blockage of the Strait.

Aside from geopolitics, last week was relatively quiet but the latest inflation report Friday morning did receive more attention. The rate of inflation increased at the fastest monthly pace since 2022 as energy prices, mostly oil, soared. The consumer price index increased 0.9% in the month, driven by a 11% increase in energy prices (oil was up over 50%). The core index, which excludes food and energy, was up 0.3%.

Inflation was 3.3% over the past year, accelerating form 2.4% in February, while the core index was 2.6%, up from 2.5%. One sub-index we have followed which the Fed does not talk about much anymore, is where inflation has been the stickiest – prices of services excluding shelter (home). This index is up 3.4% over the past year, plateauing at this level for the past several months, remaining above the general 2% target.

As FactSet mentions, market dynamics are still mostly supportive for further upside. Artificial intelligence continues to carry most corporate headlines, with several more high profile deals last week. However, there was another selloff in software and cybersecurity stocks over another headline on AI disruptions after Anthropic's announcement of a newer, more powerful model.

Next up for the market is first quarter earnings season that begins this week with some of the largest US banks reporting quarterly financial results. The bigger question will be earnings guidance, whether companies adjust forecasts given the uncertainty in the Middle East and any potential impact on inflation and the economy.

As we recently mentioned, investors have largely looked past the war in Iran (given markets are down only 2% from all-time highs) and instead remain focused on fundamentals, including earnings growth. Remember, profits are one of the most important factors that drive stock prices.

The consensus expectation sees first quarter profits growing 12.6%. This would make it the sixth consecutive quarter of double-digit earnings growth. Even better, earnings for the calendar year are expected to accelerate this year to a 16.0% growth rate, up from 13.7% last year.

The quicker the situation in Iran can get resolved, the quicker investors can shift focus back to the fundamentals and positives in the US economy. As Raymond James notes, this list includes larger tax refunds (estimated to be a $140 billion stimulus to the economy), significant increase in investment spending (an estimated $1.7 trillion in capital expenditures in 2026), a Fed easing monetary policy (lowering rates), deregulation efforts by the Trump administration, and a comeback in US manufacturing.

All these will continue to support corporate earnings. If the trend continues, earnings expectations for 2027 are even higher - a 16.3% growth rate currently which has steadily increased over the past several months, as noted in the chart below. 

Week in Review:

It was the second straight week of stock gains, coming after five consecutive declines, as a drop in oil and optimism around earnings growth/the solid fundamental backdrop. The four major indices finished as follows: Nasdaq +4.68%, Russell 2000 +3.97%, S&P 500 +3.56%, and Dow +3.04%. Treasuries were relatively unchanged - the 2-year yield was down two basis points to 3.81% while the 10-year yield rose two basis points to 4.34%. The dollar index fell 1.3%, gold finished up 1.8%, and Bitcoin rose with stocks, up 9.0%. As mentioned, oil experienced its largest weekly decline since 2022.

Recent Economic Data



• Consumer Price Index: Inflation increased at the fastest pace in March since 2022, mostly due to the impact of rising energy prices as oil was up over 50% in the month. The consumer price index increased 0.9%, driven by a 10.9% increase in energy prices. Food prices were unchanged in the month, but it is expected they will be impacted in upcoming months. The core index, which excludes food and energy prices, was up 0.2% in the month as expected. New vehicle prices were up slightly while used vehicle prices fell 0.4%. Apparel increased 1.0% (after rising 1.3% in February), medical fell 1.0%, and the largest category of shelter increased 0.3%. The headline price index is up 3.3% over the past year (accelerating from 2.4% last month) while the core index is up 2.6% (up from 2.5%). The index of services prices, excluding shelter, increased 0.3% in the month and is up 3.4% over the past year, accelerating from 3.3% last month.

• ISM Services Index: The ISM services index was 54.0 for March, lower than the 56.1 from February, indicating the services sectors continues to grow at a solid pace, but slower than the prior month (which was the fastest pace in three years). The March decline was largely due to uncertainty around the war in Iran with companies basically halting hiring plans. Of the 18 major services industries, 13 saw growing conditions in the month, three reported contraction, while two saw no change in growth. While growth overall remained solid, price increase jumped to the highest since late 2022.

• Jobless Claims: The number of unemployment claims filed the week ended April 4 was 219,000, an increase of 16,000 from the prior week bringing the four-week average up only slightly to 209,500. The number of continuing claims was 1.794 million, a decline of 38k from the prior week for the lowest level of insured unemployment since May 2024. The four-week average moved down 13k to 1.823 million.

• Consumer Sentiment: The consumer sentiment index fell to 47.6 in Apri, a six point drop from March as the war in Iran and rising oil prices weigh on consumer’s feelings about the economy. The index level is the lowest in the survey’s 48 year history. The current conditions index fell almost six points to 50.1 while the expectations index fell five points to 46.1. Expectations on inflation over the next year surged to 4.8%, up from an already elevated 3.8%.

• GDP (Delayed): The final revision on fourth quarter GDP showed the economy grew at an annualized rate of 0.5% in the quarter, a considerable slowdown from the 4.4% rate in the third quarter. Consumer spending and increased investments, both residential and nonresidential, were the contributors to GDP which were offset by lower government spending and lower exports. Sales to private domestic purchasers, a better figure of true economic growth domestically, increased 1.8%, a downgrade of 0.1% from the prior estimate.

• Personal Income and Outlays (Delayed): In a delayed release, the monthly figures on income and spending were mixed as income surprised with a decline in February and spending largely meeting expectations, while the inflation portion of the report was overall in line with expectations:
• Personal income declined 0.1% in February versus the expectation for a 0.4% increase. The biggest portion of income, wages and salaries, increased 0.2% and is up 4.3% over the past year, slowing over the past several months to the second slowest rate since 2021.
• Consumer spending increased a solid 0.5% in the month, more than the 0.3% increase in January. Goods spending was up 0.9% and services spending increased 0.3%. Over the past year spending is up 5.3% with goods up 3.0% and services up 6.4%.
• The PCE price index (one of the more important inflation measures) increased 0.4% in February as expected, with the core index rising 0.4% which is slightly more than expected. Over the past year the index is up 2.8% with core prices up 3.0%, also a tick more than expected.
• The personal savings rate was 4.0%, remaining very low. The 10-year average prior to the pandemic was closer to 7.5%.

Company News



• Apple: Nikkei reported Apple is seeing setbacks in the engineering of its foldable iPhone and could force it to delay the production and shipment schedule by months. The issues it has encountered are more complex than it initially thought and are taking more time to resolve. The report added that a few component suppliers have been notified that there was a possibility the production schedule would be pushed back. Bloomberg later reported the foldable phone remains on track for a September launch despite these engineering setbacks, however supply could be limited.

• SpaceX: Reuters reported SpaceX met with bankers, releasing more details on its IPO, saying a significant portion of shares will be available to retail investors and the IPO roadshow is expected to kick off the week of June 8. A typical IPO sees about 5-10% of shares allocated to retail investors, reports say Musk aims to allocate up to 30%.

• Broadcom: Broadcom said it made a deal with Google in a long term agreement for Broadcom to develop, supply, and support Google’s custom Tensor Processing Units (TPUs – specialized chips to accelerate machine learning, developed by Google to expand its artificial intelligence) for its future generations of TPUs.

• Delta: Shares of Delta were higher after it reported better than expected quarterly financials as demand remained strong, driven a lot by premium seating. It also said it was taking efforts to protect margins and cash flows by meaningfully reducing its capacity growth plans and taking action on fuel costs. Separately, it said it will raise checked bag fees by $10, following prices hikes from JetBlue and United.

• CoreWeave: Shares of CoreWeave were higher after it announced a long-term agreement with Meta, expanding on its 2025 agreement, to provide AI cloud computing capacity through 2032 for $21 billion. The added capacity will be deployed across multiple locations and include the initial deployments of Nvidia’s newest AI chip platform Vera Rubin. Separately, CoreWeave announced an agreement with Anthropic to support the development and deployment of Anthropic’s Claude family of AI models where Anthropic will use CoreWeave’s cloud computing capacity to run its workloads.

• Tesla: Reuters reported Tesla is working on developing a new compact and lower cost all-electric SUV. The sources say Tesla has been in talks with suppliers about the plans and said the vehicle would be priced substantially below the price of its Model 3 (which currently starts at $37,000 in the US). 

Other News



• Medicare Advantage Pricing: The Centers for Medicare & Medicaid Services released its2027 Rate Announcement last week that included the final reimbursement rate for Medicare advantage plans that was much better than feared, leading to higher share prices for insurers involved in Medicare (companies like UnitedHealth and Humana). The expected increase in reimbursements was just 0.09% in the initial estimate a few weeks ago, but was increased to 2.48% in the final ruling, equating to over $13 billion in additional Medicare Advantage payments to plans in 2027.

• Trump Accounts: The US Treasury announced it has selected BNY (Bank of New York Mellon) as the financial agent and to help implement the new Trump accounts, including the managing of the initial accounts and helping develop a new Trump Accounts app. BNY has partnered with Robinhood to serve as the brokerage and initial trustee for the accounts, as well as helping to develop the apps interface. Contributions can begin July 4. Keep a look out, as we approach this date and more information is available, we will include in a future newsletter.

• 2027 Budget Proposal: The Trump Administration released its 2027 budget proposal that includes a $1.5 trillion increase in defense spending, the largest increase in years and an indication of Trump’s emphasis on military investment. Trump had previously suggested an increase in defense spending to modernize the military for new threats. In addition, the proposal looks to reduce non-defense spending by 10% by shifting some responsibility to state and local governments. 

• NFL Investigation: The Wall Street Journal reported the Justice Department is opening an investigating into the NFL over its media rights deals and whether the NFL broadcast policy engages in anticompetitive practices and harms consumers. The investigation comes after the DOJ has received complaints that watching football has become too expensive, in part because deals which leagues offer smaller packages of games to streamers.

• AI Disruption: Stocks of cybersecurity companies were lower after reports said OpenAI is finalizing a model with cybersecurity capabilities that it says are similar to Anthropic’s Mythos model. Separately, Treasury Secretary Bessent and Fed Chairman Powell are calling on a group of bank CEOs in an urgent meeting to discuss the risks these AI models create, with worries these AI models could get in the wrong hands of people and one day autonomously disrupt key systems like the electric grid, utilities, water, or financial systems. 

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