The Weekly Wrap: BayFort Capital Global Equity Research

This week, the markets rebounded after three consecutive weeks of losses, with investors analyzing the busiest earnings week for Q1CY24 corporate earnings. The gains in indices were across the board with both Small caps and Large caps gaining steam during the week. The S&P 500, representing large-cap U.S. stocks, recorded a gain of 2.67%, whereas the Russell 2000, which tracks smaller companies, saw a gain of 2.79%. Additionally, an equal-weighted version of the S&P 500 rose by 1.67%. In Europe, the STOXX 600 ended the week higher by 1.74%. The gains across the US & EU were primarily driven by stellar earnings and upward revisions for next quarter's earnings from both MSFT & GOOGL. On the other hand, both META & INTC disappointed investors but that was more company-specific and didn’t impact market sentiment. As of the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have increased by 3.7% in the first quarter relative to the year before, with “both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises... above their 10-year averages.” Secondly, the easing of the Middle East tensions further helped reduce uncertainties.

On the macro front, Thursday's bleak economic report seemed to be received as just that—bad news. The Commerce Department's initial assessment indicated that the economy expanded at an annualized rate of 1.6% in the first quarter, significantly lower than the consensus forecast of approximately 2.5% and marking the slowest growth pace in nearly two years. Various factors contributed to this sluggish growth, including a notable deceleration in government spending and an expanding trade deficit. Moreover, consumers continued to tighten their belts, particularly in their spending on goods. The release of inflation data on Thursday also rattled investors, fuelling concerns that the United States might be on the brink of "stagflation"—a scenario characterized by rising prices amid weak economic growth. The Commerce Department's core personal consumption expenditures (PCE) index, excluding food and energy, rose at an annualized rate of 3.7% in the first quarter, surpassing expectations and significantly exceeding both the 1.7% increase recorded in the fourth quarter and the Federal Reserve's long-term inflation target of 2%.

However, stocks staged a rebound on Friday, largely attributed to more positive inflation data. Futures surged following the Commerce Department's release of the monthly core PCE data, which showed a slight decline in core PCE inflation on an annual basis in March, dropping to 2.82% from 2.84% in February. This continued a downward trend that commenced in October 2022.

BayFort Capital View: Market dips resulting from geopolitical concerns can present attractive entry opportunities for investors on the sidelines. While geopolitics may pose short-term challenges, it's unlikely to significantly impact the US economy in the medium to long term. Therefore, markets are expected to eventually overcome these issues. The US Fed is willing to support the economy if required thereby providing support on the downside (if any) to the markets providing a safety net for the markets (known as the "Fed Put"). Futures markets point to a coordinated easing cycle across the OECD, with 29 out of 30 countries. This year is the year of Global Central Bank rate cuts, so we should see valuations improve as interest rates decline in line with rate cuts. This could pave the way for a new stock market upcycle driven by a double whammy: lower interest rates boosting valuations and robust earnings growth fuelled by a paradigm shift in computing and productivity powered by artificial intelligence (AI) in CY24-25. Our analysis indicates that the current market conditions provide an excellent opportunity to invest in global stocks, offering the potential for significant returns over the next 18-24 months.

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