Don’t look now, but equities have managed to post gains for 9 consecutive days. This further strengthens the case that the meaningful bottom for the S&P 500* was set around April 8.
To begin the Cornerstone analysis today, we want to examine some macro developments as well as economic news.
On the on the macro front, we continue seeing positive momentum. First, last week Commerce Secretary Howard Lutnick said one trade deal is actually complete:
Second, the White House signed an executive order aiding autoworkers by removing the possibility of stacked tariff burdens on automakers:
This is important as it provides somewhat of a cushion while more infrastructure moves to the U.S.
These continuing positive developments point to further de-escalation on the tariff front. That’s a good thing for both the economy and equity markets.
Also, we continue to see softening in the labor data. One example is February job openings tanking to about 7.2 million versus an expected 7.5 million:
Also, the most recent employment report, while better than expected, showed marginal slowing and a steady 4.2% unemployment rate.
Add that to last Wednesday’s March Core Personal Consumption Expenditures (PCE) report:
The PCE expectation was for an 0.11% rise, while the actual figure was 0.1%, adding to the mixed bag of data as it is the mildest reading since March 2021.
While these reports are positive, markets mostly ignored them because the data doesn’t reflect potential tariffs yet.
Earnings to the Rescue
All that said, let’s move our attention to what we've been waiting for, and frankly, what truly matters at this point of every quarter: earnings.
Prior to last week, there were few “tape bombs” that profoundly moved markets. But right on time, big technology companies – the growth engines of the market – dropped positive bomb after positive bomb.
It started with Google#. Then Meta^ and Microsoft^ followed. And while Amazon^ guidance wasn’t loved by analysts, the company’s fundamentals were quite good.
All told, some of the most important takeaways from those earnings releases aren’t the numbers themselves, but the telling commentary on the earnings calls. Given the macro uncertainty, you might think these firms’ executives would be cautious and indicate spending pullbacks.
That wasn’t the case. Each of these tech giants made it clear they will expand capital investments on their AI infrastructures significantly.
This information supports the continued bullish reaction by the market overall. In fact, we saw a fifth consecutive day where the S&P 500 closed above the 50% retracement level of 5,491.
This matters because historically closing above a 50% retracement level almost always signals the worst of the selling being over.
Of course, we know 2025 is not a normal market and there's still work to be done to clarify any tariff distortions in the economic data looking forward. Still, we continue to believe companies are resilient and nimble. Thus, our current outlook is the glass is half full.
Our optimism is further supported by five quantitative signals that were triggered in the second half of April:
1. Volatility surging, then swiftly calming on April 14.
2. Beginning on April 22, breadth expanded as 90% of S&P 500 stocks advanced two consecutive days.
3. The next day, high yield spreads recovered which is indicative of walking back from a recession.
4. On April 24, stocks completed a Zweig Breadth Thrust trigger.
5. Stocks hit the 50% retracement level, closing above 5,491, on April 25.
Those are surely positive happenings, however, there are still risks worth monitoring. Though even with that being the case, we’re starting to see fundamentals take control as the earnings picture becomes clearer.
Most importantly, over the last two weeks bull market growth engines like technology and discretionary stocks have led the market charge:
It seems confidence has returned to the AI trade after stalling earlier in the year.
As of this writing, we’re about halfway through earnings season and witnessing the underlying strength of U.S. companies. Through last Wednesday, 57% of S&P 500 companies reported earnings with another 181 due to report by the end of last week alone.
Of the reported earnings, 77% of companies beat their earnings estimates, which is in line with the five-year average and above the 10-year average of 70.5%:
Even more impressive is those companies reported actual year-over-year earnings growth of 15.5%. Including estimates of the companies yet to report, the blended earnings growth rate is projected to be 12.2% year-over-year:
Should that occur, it would mark the second consecutive quarter of double-digit earnings growth.
What’s more interesting is analysts are still projecting earnings growth rates of 6.4%, 8.8%, and 8.3%, respectively, for the remaining quarters of this year, even with general uncertainty moving forward. If that plays out, the calendar year earnings growth average would be 9.7%.
If this earnings growth rate is accomplished, the forward 12-month price-earnings ratio would be 19.8, which is below the five-year average of 19.9.
Digging further, as we sit here today, the blended first-quarter net profit margin for the S&P 500 is 12.4%. That’s above the five-year average of 11.7%. If that figure holds, it would be the fourth consecutive quarter of the S&P 500 reporting a profit margin above 12%.
Also interesting is that looking forward, analysts believe net profit margins will continue to improve in 2025:
On a sector level, six of the 11 sectors are beating their five-year net profit margin averages:
This fundamental strength being exhibited by U.S. companies does have an important risk that’s yet to be determined. That is, economic data is beginning to show some early signs of a potentially tighter labor market.
An important forward-looking data point is the Conference Board’s Leading Economic Index (LEI). It factors in many components to create an overall picture on economic matters. This predictive index is helpful to anticipate turning points in the business cycle by about seven months in advance, on average.
The LEI has slowed recently, declining 5.7% in March – a third consecutive monthly drop. So, there are indications of some economic weakness.
That was also realized in the gross domestic product data released last week, which showed a 0.3% decline in Real GDP on an annual basis:
This drop was due to the decline in government purchases and a significant increase in the import of goods in advance of tariffs.
We think it would be prudent for Federal Reserve Chairman Jerome Powell to get in front of this potential risk with a preemptive interest rate cut at the central bank’s May 7 meeting. This would help cushion consumer and business confidence.
Unfortunately, precedence does not give us confidence that the chairman will be early rather than late in making a rate policy decision.
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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# Google shares are owned in Cornerstone client accounts.
^ Meta, Microsoft, and Amazon shares are owned in Cornerstone client accounts and by Daniel Milan personally.
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