Markets Pause as Hot Inflation and Rising Yields Test Seven-Week S&P 500 Rally

Markets Pause as Hot Inflation and Rising Yields Test Seven-Week S&P 500 Rally

Equity markets were mixed for the week as the S&P 500 eked out a seventh consecutive weekly gain of 0.2% to close at 7,408.50, touching a record high on Thursday before pulling back Friday, while the Dow Jones Industrial Average and Nasdaq Composite both slipped 0.1%. Leadership narrowed sharply, with U.S. large cap growth outperforming value for the sixth time in seven weeks, while small caps lagged meaningfully as the Russell 2000 fell 2.3%. International markets were broadly weaker, with the MSCI EAFE down 1.5% and emerging markets off 2.4%, dragged by a 7.2% decline in Brazil and a strengthening U.S. dollar that posted its largest weekly gain in two months.

Inflation Heats Up

Inflation data came in hotter than expected and reignited concerns about the Fed’s policy path, as the April Consumer Price Index rose 0.6% month over month and accelerated to a 3.8% annual pace, the sharpest jump since May 2023, while core CPI climbed 2.8% year over year, above the 2.7% estimate. Wholesale prices were even more striking, with the Producer Price Index rising 1.4% in April, the largest monthly increase since March 2022, and jumping 6.0% annually, the highest reading since December 2022. Energy was a key driver on both fronts, with wholesale energy prices up 7.8% in April following a 10.1% surge in March.

Bond Yields Surge

The bond market reacted sharply to the inflation prints, with U.S. Treasury yields spiking to multi year highs. The 10-year yield closed the week at 4.59%, its highest level in over a year and up from under 4.00% in late February, while the 2-year reached 4.08% and the 30-year touched 5.12%, the highest since 2007. The move pressured fixed income across the curve, with the Bloomberg U.S. Aggregate down 1.1% for the week, and rate futures via CME FedWatch now implying roughly a 50% probability of a quarter or half point rate hike by December, with less than a 1% chance of a cut.

Strong Earnings Growth

First quarter earnings season continues to provide a fundamental tailwind, with FactSet data showing S&P 500 companies on pace for revenue growth of 11.4%, the highest since Q2 2022, and earnings growth of 27.7%, the strongest since Q4 2021. Sector performance for the week reflected the inflation driven rotation, with energy leading at +7.0% as WTI crude rallied 10.1% amid stalled U.S. Iran peace talks, followed by consumer staples (+1.3%), information technology (+1.2%), and healthcare (+1.1%). Consumer discretionary, materials, and real estate all declined more than 2% as higher yields weighed on rate sensitive sectors.

Looking Ahead

Looking ahead, the week of May 18 to 22 will be relatively light on top tier economic data, with focus turning to the Conference Board’s Leading Economic Indicators and several housing market readings, including building permits, housing starts, and existing home sales.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.