Stocks Mixed, Breadth Weak on Rising Inflation Pressures

Three of the four major US equity indices finished lower for the week, with the S&P 500 the sole gainer, though up just 0.13%. Despite the higher close, market breadth was very weak – the equally weighted S&P 500 index underperformed by 1.4%. Small caps (measured by the Russell 2000 index) were a signifnact underperformer, falling 2.37% on the week. What drove the S&P 500 positive was a solid week by several megacap names, including Nvidia’s 4.7% and Amazon’s 3.1% gains. The strongest area of the market this year, semiconductors, cooled with the index down 1.5% for the week.

Meanwhile, weakness in the bond market accelerated last week as yields saw the largest jump in weeks. The 2-year Treasury yield rose 18 basis points (0.18%), moving back above 4% while the 10-year Treasury yield rose 24 basis points to 4.60%, the highest in 16 months (for reference the 10-year peaked at 5.0% late 2023).

At the same time, investors in the Treasury auction saw the new 30-year bond pay 5.046%, the first time the rate has topped 5.0% since 2007. The increase comes as Treasury auction bidders demanded a higher rate to compensate for rising inflation risks.

That was one of the bigger stories last week – the two most recent inflation reports both posted numbers above consensus expectations. The latest consumer price index increased 0.6% in April. Of course much of that was due to higher oil prices as a result of the conflict in Iran, with energy prices rising another 3.8% in April.

However, inflation remains a little above target with the annual rate excluding food and energy prices up 2.8% over the past year, accelerating to the highest since last September. Consumer inflation is running at an annualized rate of 5.5% since the beginning of the year.

Wholesale inflation was even higher – the producer price index increased an outsized 1.4% in April, following a 0.7% increase in March. Energy was a big driver of wholesale inflation, up 7.8% in the month, but also due to service areas like a 2.7% increase in trade services and 5.0% increase in transportation and warehousing. Wholesale prices are up 6.0% from a year ago, the highest since late 2022.

The conflict in Iran, coupled with oil prices reaching four-year highs, has reignited inflation concerns and prompted a meaningful repricing of interest rate expectations since the start of the year. Markets are currently putting 50% odds the Fed will hike rates by the end of the year. This is a complete reversal from when we entered the year when markets were pricing 95% odds of at least one rate cut by year end, and 0% odds of a rate hike. The repricing reflects rising inflation concerns.

The biggest theme this year remains the artificial intelligence story. Last week focused on Cisco’s 22% post-earnings rise due to better than expected financial results that were driven by AI, and the largest initial public offering (IPO) of the year from AI company Cerebras.

The maker of AI supercomputers priced its IPO at $185 per share, seeing the IPO oversubscribed by 25 times, and such strong demand when it opened that the stock surged 68% in its trading debut, at one point even doubling in price. This valued the company at $67 billion, making it the largest semiconductor IPO ever. Press reports highlighted the company's wafer-scale chips that allow for much faster computing speed, AI inference market focus and recent deals with OpenAI and Amazon.

On geopolitics, there was not much progress in Iran negotiations, with the US reportedly considering more military action to break the stalemate.

The bigger geopolitical headlines was around President Trump’s visit to Beijing to meet with China’s President Xi in effort to stabilize U.S.-China relations, with discussions focused mostly on trade, but also Taiwan, AI, semiconductors, and global energy security like rare earth minerals. Xi reportedly warned that Taiwan remains the most sensitive issue between the two nations and cautioned that mishandling it could lead to conflict, while also urging the two countries to be “partners rather than rivals” and avoid falling into the “Thucydides Trap” of a rising power challenging an established one.

Trump described the talks as “productive” and emphasized economic cooperation, including trade negotiations, energy exports, and technology issues. The meeting also included discussions around AI infrastructure and semiconductor restrictions, with Nvidia chip sales and broader tech competition playing a major role.

While no major agreements or breakthroughs were announced, both sides appeared focused on preventing relations from deteriorating further and maintaining open lines of communication amid growing geopolitical rivalry. Trump also invited Xi to the US in September.

AI and earnings remain the key driving factor for market upside. This week is another critical one when it comes to these topics with Nvidia, the largest company in the world with a market capitalization of nearly $5.5 trillion, set to report its earnings after the market close on Wednesday. Another strong earnings beat is expected, but focus will remain on forward guidance.

The other focus will be on retailers as earnings season shifts its focus to this sector. With high inflation lingering and high gasoline prices pressuring consumers’ budgets, investors will be attentive to results and guidance from these companies to help assess economic health. Several examples include Walmart, Target, Home Depot, and TJX.

While strong earnings continue to be the catalyst for higher stocks, the recent run up makes stocks vulnerable for a pause or even a pullback. In addition, markets are running into seasonal weakness, not only calendar year weakness, but also due to where we are in the presidential cycle.

As seen in this week’s chart, the second and third quarter in a Midterm year are by far the weakest quarters of the presidential cycle. The second quarter of the second year averages a -2.53% return while the third quarter averages -0.83% going back to 1944. The good news is there is historically a strong bounce back, with the following two quarters averaging a combined +13.37%. 

Recent Economic Data



• Consumer Price Index: The consumer price index increased 0.6% in April as was expected and comes after a 0.9% increase in March. The large back to back increases pushed the annual inflation rate to 3.8%, also as expected, and the highest level in three years. Energy prices are the main culprit, rising another 3.8% in April due mostly to fuel prices up 5.8% in April and up 54.3% over the past year. Food prices also saw a sizeable increase, up 0.5% in the month and 3.2% over the past year. Beef prices stick out, rising 15% since last year. Excluding food and energy, core prices increased a slightly more than expected 0.4% and are up 2.8% over the past year. Shelter prices saw an adjustment in the way they were calculated during the government shutdown, leading to lower readings, and that reversed in April with shelter up 0.6% and up 4.2% over the past year. Services prices increased 0.4% in April and up 3.5% over the past year, back to the highest since September.

• Producer Price Index: Wholesale inflation, measured by the producer price index, increased 1.4% in April, a much higher rate than the 0.5% increase that was expected and follows an upward revised 0.7% increase from March. As was the case with consumer inflation, energy prices drove much of the increase, rising 7.8% in the month. Food prices rose 0.2%, while prices for final demand goods increased 0.7% when excluding food and energy. On the service side, prices in trade rose 2.7% while transportation and warehousing prices rose 5.0%. Overall, wholesale prices are up 6.0% from a year ago, and 4.4% excluding food, energy and trade services.

• Retail Sales: After seeing a strong monthly increase of 1.6% in March, retail sales grew 0.5% in April. Like March, even though gasoline sales rose at a higher rate because of higher gas prices (gasoline sales up 2.8% in April), retail sales were still strong across the board. Vehicle sales fell 0.4% and excluding vehicle and gas sales (because both are pretty volatile month to month), core retail sales rose 0.7%. Of the 13 major retailer categories, nine of them saw increasing sales in the month led by electronics, sporting goods, e-commerce, and grocery stores. Furniture, vehicles, and apparel were categories that saw a decline.

• Existing Home Sales: Sales of existing homes were relatively unchanged in April at a seasonally adjusted annual rate of 4.02 million homes. Over the past year the sales pace was unchanged at 4.02 million. Inventory is still low - the number of existing homes listed on the market improved 5.8% in April with 1.47 million homes available, equaling 4.4 months supply, but still below 5.0 months that signifies a balanced market, and only up 1% from last year. However, the average home lasted 32 days on the market, a big drop from 41 days last month. The median sales price increase slowed again, up 0.9% over the past year to $417,700. Existing sales are based on closings, so these represent homes that went under contract in March when mortgage rates began to climb.

• Jobless Claims: The number of jobless claims the week ended May 9 was 211,000, an increase of 12,000 from the prior week with the four-week average up slightly to 203,750. The number of continuing claims increased 24k to 1.782 million with the four-week average down about 7k to 1.781 million. 

Company & Other News



• eBay: Last week GameStop, a $11 billion company, offered to buy eBay for $56 billion. After the offer many questions arose about how GameStop would fund the deal. Last week eBay responded by rejecting the offer, calling it neither credible nor attractive, citing six specific reasons.

• Google: The WSJ reported that Google said it has engaged in talks with SpaceX for a rocket-launch deal where Google would use SpaceX’s rockets to launch data centers into Earth’s orbit as the two look to partner in what SpaceX CEO Elon Musk said is the next frontier for the company. It was reported Google is also in talks with other rocket-launch companies.

• Ford: Shares of Ford were up over 10% as investor confidence in its energy storage business grows after Morgan Stanley upgraded the stock, saying investors are underestimating its involvement in the energy storage market. It said Ford will benefit from its partnership with the world’s largest EV and energy storage battery manufacturer CATL, where they will build a massive battery plant in Michigan, by offering battery storage systems for data center and utility customers.

• Federal Reserve: Fed commentary has consistently moved more hawkish over the recent weeks (more hawkish means leaning toward tighter policy, i.e. raising interest rates). Last week, Boston Fed president Collins said she sees some scenarios where the Fed could be tightening policy, adding energy shock raises downside risk to economy and upside risk to inflation, with inflation likely to remain elevated and warranting the Fed to maintain current rate levels. Minneapolis president Kashkari said the Iran conflict has upended inflation and has run above target for five years.

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