In today’s Steady Investor, we are taking a deeper dive into key market factors that we believe investors should keep an eye on, such as:
• The April inflation report
• Pressure is on for corporations to beat earnings expectations
• Share buybacks rose sharply in Q1
The April Inflation Report Welcomed by Investors and the Fed – Inflation came in hotter-than-expected in the first quarter, which had many market watchers on edge for April’s consumer price index (CPI) report. Fortunately, it did not disappoint. The Labor Department reported that CPI rose 3.4% from a year ago, with core prices (excluding food and energy) up 3.6%. Many investors reading these figures may see them as problematic and think “isn’t inflation still well above the Fed’s 2% target?” The short answer is yes, but the important takeaway is that inflation is not re-accelerating—an important distinction for the Fed. At 3.4%, CPI’s year-over-year increase was the lowest it has been since April 2021. In addition, consider that last April, the CPI print was 4.9% year-over-year, which underscores inflation’s gradual but steady trend downward. Gas prices and housing contributed to inflation’s stickiness in April, though year-over-year rent increases slowed from March levels.1
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The CPI Measure of Inflation Eased in April, Providing Relief to Investors and the Fed
Equity markets seemed to welcome the inflation news, with the S&P 500 rising to a record high along with the Nasdaq and the Dow Jones Industrial Average. With retail sales also coming in lighter-than-expected, and April jobs growth marking a steep decline from March payrolls, the U.S. economy is seen as slowing as inflation modestly ticked lower. Bond prices seemed to suggest that the Fed could be closer to cutting interest rates as well—yields on 2-year U.S. Treasury bonds fell on the news.
Pressure is On for Corporations to Beat Earnings Expectations – S&P 500 companies are poised to deliver year-over-year earnings growth of 5.4%, the largest increase in almost two years. But with the S&P 500 trading at around 20x forward earnings, there’s a good argument that Wall Street has already priced in better-than-expected earnings, leaving corporations very little wiggle room for disappointment. Indeed, companies that have missed on earnings have seen their shares fall an average of -2.8%, which is higher than the five-year average of -2.3%. And on the flip side of the equation, corporations that have exceeded expectations have only seen shares rise an average of 1%, largely in line with the five-year average of 0.9%. The Federal Reserve may also be influencing the higher bar for U.S. corporate earnings. With falling expectations for rate cuts in 2024, investors have had to factor in a higher discount rate for future cash flows, which is making stocks look more expensive relative to bonds.4
Share Buybacks Rose Sharply in Q1 2024 – The message corporations are sending to markets, however, is that businesses and balance sheets are in good shape. In addition to better-than-expected earnings, companies have been buying back shares at a strong pace so far in 2024. S&P 500 companies announced nearly $200 billion in share buybacks in Q1, a 16% increase from the same period in 2023. Around 443 companies have announced plans to buy back shares, which is up from 378 a year ago. Companies typically buy back shares to boost shareholder equity by reducing the number of shares outstanding, and they can be a signal to markets that the business is confident about the growth outlook. By some estimates, S&P 500 share buybacks could reach $925 billion in 2024, an annual growth rate of 13%.5
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Disclosure
2 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
3 Fred Economic Data. May 15, 2024. https://fred.stlouisfed.org/series/CPIAUCSL#
4 Wall Street Journal. May 12, 2024. https://www.wsj.com/finance/stocks/wall-street-turns-up-the-heat-on-companies-to-perform-12010d2b?mod=djemMoneyBeat_us
5 Wall Street Journal. May 9, 2024. https://www.wsj.com/finance/stocks/stock-buyback-big-tech-314f79c5?mod=djemMoneyBeat_us
6 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
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