Stocks post gains as Big Tech earnings better than expected

The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak. – Benjamin Graham

It was another busy week for first quarter earnings and despite mixed economic data and concerns about the survival of First Republic Bank, stocks closed higher with the technology-heavy Nasdaq Composite Index increasing 1.3% after strong earnings from Microsoft, Meta Platforms (Facebook) and Alphabet (Google). The Dow Jones Industrial Average and the S&P 500 Index gained nearly 1%. Concerns about the health of regional banks began on Monday when First Republic Bank reported weak earnings and said that deposits had dropped 40% in the first quarter. Speculation grew that the Federal Deposit Insurance Corporation will likely take receivership of the bank and the stock plunged 75% for the week. But while this news negatively affected regional bank stocks and other sectors of the market, the Nasdaq and Big Tech stocks in particular bucked the trend. Microsoft easily beat analysts’ estimates on both the top and bottom lines after the market closed on Monday and offered guidance for the year that exceeded expectations. That earnings report was followed by Alphabet, which also topped revenue and profit projections and authorized a $70 billion stock buyback, and Meta Platforms, which not only exceeded expectations but issued an optimistic outlook for the current quarter. Amazon also reported positive results but warned that its cloud revenue growth would continue to slow over the near-term. It wasn’t only the large technology companies that reported favorable numbers, either, as companies such as Caterpillar, McDonald’s, PepsiCo, 3M and General Motors also announced revenue and earnings that surpassed estimates. As of Friday, with just over half of S&P 500 companies having reported first quarter earnings, 80% of them had beaten estimates. However, the economic data released last week was both good and bad. The gross domestic product (GDP) rose at only a 1.1% annualized pace in the first quarter, below the 2% estimate and much less than the fourth quarter increase of 2.6%. But the headline personal consumption expenditures (PCE) index in March, the Fed’s preferred inflation measure, edged only slightly higher while the core PCE that excludes food and energy prices was in line with expectations and up 4.6% on an annual basis, both indicative of lower inflation.

Last Week

Durable goods orders in March were much better than expected and more than in February and new home sales increased in March and were higher than forecast. The Conference Board’s consumer confidence index fell in April from its March reading and weekly jobless claims totaled 230,000, a decline of 16,000 from the previous week and below the estimate of 249,000.

For the week, the Dow Jones Industrial Average rose 0.9% to close at 34,098 while the S&P 500 Index also increased 0.9% to close at 4,169. The Nasdaq Composite Index gained 1.3% to close at 12,226.

This Week

The April employment report is expected to show that about 185,000 new jobs were created and that the unemployment rate remained unchanged at 3.5%. ADP’s National Employment Report for April is forecast to show that 135,000 private-sector jobs were added. The ISM Manufacturing Purchasing Managers’ Index (PMI) for April is expected to be below 50 again, making it the fifth straight month of contraction, while the ISM Services PMI is forecast to be above 50, a sign of continued expansion.

The Federal Open Market Committee (FOMC) meets to review its monetary policy and is expected to raise the federal funds interest rate by 25 basis points (a basis point is one hundredth of one percent). The European Central Bank (ECB) is also scheduled to meet and is expected to raise its benchmark interest rate by the same amount, bringing it to 3.25%.

Among the most prominent companies scheduled to report first quarter earnings this week are Apple, Advanced Micro Devices, Qualcomm, Cigna, MetLife, DuPont, Ford Motor, Illinois Tool Works, Emerson Electric, Cummins, Marathon Petroleum, Phillips 66, ConocoPhillips, Dominion Energy, Marriott International, Starbucks, Kraft Heinz, Yum Brands, Anheuser-Busch InBev, Pfizer, CVS Health and Moderna.

Portfolio Strategy

Although this week will be another busy one for first quarter corporate earnings reports, the main event will be the Federal Open Market Committee (FOMC) meeting followed by Fed Chairman Jerome Powell’s press conference. Despite weak GDP growth in the first quarter, improving inflation data and worries over the health of regional banks, the Fed is still expected to raise the federal funds interest rate by 25 basis points for the 10^th time since March 2022, bringing the rate to a range of between 5% and 5.25%. The probable failure of First Republic Bank could influence the Fed’s decision by pausing, but the Fed has been adamant in its view that inflation needs to be reduced to its target of 2%. Inflation has come down a lot from its peak of over 9% last year, but it still remains high and bringing it down further from here could be more challenging. Making the Fed’s job more difficult is the fact that the labor market remains tight as there have been fewer layoffs than expected and the unemployment rate has remained low. While the Fed is expected to pause after this rate hike and hold the federal funds rate steady for a while, the market expects the Fed to cut rates later in the year to avoid a possible recession. That belief helps explain why the 2-year Treasury yield is only 4.05% while the 10-year Treasury yield has fallen to 3.45%. The Fed and Jerome Powell will also likely address regulatory deficiencies in light of the failure of Silicon Valley Bank and Signature Bank as well as the travails of First Republic Bank.