Week of May 13, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

After months of plateauing Consumer Price Index inflation, the most recent April print finally brought some renewed cooling. While markets were expecting this break, they were nonetheless relieved. Rates dropped and equities raced higher as the prospects of the U.S. Federal Reserve enacting two rate cuts this year were revived.

As we approach the end of earnings season for companies in the S&P 500 Index, the benchmark’s report card surpassed expectations. When earnings first kicked off, analysts expected 3% year-over–year earnings-per-share growth. Now, the figure is about double that. The market rewarded companies that beat expectations and penalized those that fell short.

Some the key themes percolating through earnings were AI traction, consumer health and a focus on sustaining margins. Over 40% of index companies, double its level a year ago, mentioned AI by way of either product offering, productivity or investment. But we have observed that the network is broadening beyond chips and data centers to energy and utility companies, who ultimately power the processing infrastructure.?

The health of the consumer is showcased across different sectors. Banks generally reported that the consumer is holding up with balance sheets in decent shape. But consumer-facing companies see more discerning customers hunting for value.

Expense management was the other earnings theme as companies stressed diligence on managing their fixed costs and margins. Meanwhile, investors are rewarding high-margin companies, becoming more demanding that companies deliver on their plans and promises.

Sources: Bloomberg, Financial Times, Goldman Sachs, 2024.

Richard Familetti, CFA , Chief Investment Officer, U.S. Total Return Fixed Income

The persistence of tight credit spreads is likely to continue until a serious catalyst breaks the euphoria. We view the dynamics working in favor of credit spreads as being demand/supply imbalance, extremely stable to somewhat improving credit quality and high interest rates relative to the past several years. These factors, in our view, suggest a lack of impending credit quality issues except in very idiosyncratic situations.

In practice, this means that markets will likely need to see a major extraneous catalyst or what we believe are clear signs of a recession for any significantly negative impact on credit spreads. Absent those possibilities, we expect spreads to remain tight and relatively fully invested. The compression between BBB-rated and AA/A-rated credits suggests particular opportunities in higher quality creditors as well.

Source: Bloomberg, 2024.

The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice. SLC Management is not affiliated with, nor endorsing, any third parties mentioned within this article.

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here. It is not possible to invest directly in an index.

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