The markets ended the week on a strong note, closing sharply higher on Friday, as strong earnings reports from mega-cap technology firms Alphabet (Google) and Microsoft, as well as inflation data in the U.S. that was in line with expectations, supported a rebound in market sentiment.
Despite a volatile week, the S&P 500 closed higher by over 2.6% on the week. However, after five straight months of gains across the S&P 500, Nasdaq and Dow Jones, the indexes are all on track for a losing month in April. This would also mark the first correction in stocks for the year, as uncertainty around Fed rate cuts and the path of inflation sparked volatility in equity and bond markets.
Last Week, all 11 S&P 500 sectors finished higher. Mega cap gains had an outsized impact on index performance, though, driving gains in the information technology (+5.1%), consumer discretionary (+3.5%), and communication services (+2.7%) sectors. However, the PHLX Semiconductor Index (SOX) led the way, jumping 10% on the week.
Strong earnings reports and guidance on Thursday from technology heavyweights Google and Microsoft helped drive a sharp snap-back in markets and sentiment. Both companies highlighted strong returns from their artificial intelligence (AI) businesses. Google also announced its first-ever cash dividend.
More broadly, about 45% of S&P 500 companies have reported first-quarter earnings already, with 80% of these reporting a positive earnings surprise, well above the 10-year average of 74%.
Based on generally strong earnings reports, the first-quarter GDP report, and the release of the Fed’s preferred measure of inflation, investors had plenty to digest as markets continue to navigate a choppy start to the second quarter. With the strong new data, stocks recovered half of the April losses on the back of the above-mentioned tech strength.
Mega-cap tech stocks have experienced a huge rally over the last two years, which, unlike the tech bubble of 2000, has been driven by strong earnings growth. The opportunities in AI appear to have a lot of growth potential.
However, the earnings outperformance gap with the rest of the market will likely start to narrow in the back half of the year, supporting the view that the rally will broaden to other companies and sectors that have lagged.
We may be entering a choppier phase of the market, driven by uncertainty around the path of Fed policy.
The pendulum has shifted from investors having an optimistic outlook on rate cuts earlier this year to a probable delay in those cuts until later this year.
Technically, we’ll have to see if the indices can follow through and press even higher, as the oscillators are not yet overbought, and relative strength and positive confirming technicals seem to be indicating they can, at least for the short term.
And remember, trade what you SEE not what you think!
Get Live Market Guidance As It Happens
Start a FREE trial 10-day Trial And Gain VIP Access To The Tech Trader Today
Gain instant access to the live trading room where Harry share’s his pre-market focus list, live market analysis, recommendations and commentary from market open to close, along with livestream webinar.
