Stocks and bonds saw a robust rally last week, with the S&P 500 reaching new all-time highs. The Magnificent 7, consisting of tech giants like Microsoft, Meta Platforms, Amazon, Apple, NVIDIA, Alphabet, and Tesla, outperformed with an 11.3% increase since mid-April. The rally has been driven by declining U.S. Treasury yields and small-cap stocks beginning to perform better, outperforming the S&P 500 by 7.7%.
Despite some softness in economic growth estimates, U.S. economic growth remains solid, easing inflation worries and keeping corporate earnings estimates intact. Consensus 2025 earnings estimates for the S&P 500 have continued on an upward trend, leading to stock valuations below previous levels despite the rally. The April data showed a decrease in consumer inflation, with the year-over-year pace declining to 3.4%.
The supercore measure of services inflation rose to 4.9% year-over-year, indicating that while progress has been made in the fight against inflation, the battle is not yet over. The labor market, a crucial factor in services inflation, has softened since mid-April, pointing to a slight easing in labor demand. Markets now expect a Federal Reserve easing in September, with an 82% chance of rate cuts and two cuts of 25 basis points in 2024.
The rally in stocks and bonds has been fueled by the expectation of the Federal Reserve reacting to economic softness rather than elevated inflation. The outperformance of economically sensitive small-cap and bank stocks has raised the odds of an economic soft landing, with markets expecting the Fed to ease monetary conditions. However, there are risks involved, and any disappointments could lead to market volatility. This week, several significant retailers are reporting earnings, which may provide additional insight into consumer behavior and market trends.
