Catch 22 – Inflation vs. Earnings

At a headline level, stock markets appear to be in a “catch-22”, digesting lower inflation numbers while trying to assess how much of this inflation is down to lower growth, which may then flow through to earnings.

Key points

• New Zealand equities and bonds both delivered strong returns over the month, with the S&P/NZX 50 Gross index (with imputation credits) returning 1.1% and the Bloomberg NZ Bond Composite 0+ Yr Index up 1.0%.
• The MSCI All Country World Index (ACWI) returned 2.8% in New Zealand dollar terms, and 1.4% in New Zealand dollar-hedged terms. The theme of big cap tech leading the index advance continued in April, with Microsoft, Apple, Meta and Alphabet responsible for more than a third of the ACWI return (remarkable given the index is comprised of over 2,800 stocks).
• The US corporate earnings season kicked into gear over April. At the time of writing, 425 companies in the S&P 500 had reported earnings, with 78% beating consensus earnings expectations. Bottom-up consensus earnings expectations for next year have, in aggregate, increased.

The US economy showed further signs of slowing over the month and recent banking stress is likely weighing on loan growth. Business surveys have generally surprised to the downside and suggest a greater pace of contraction in the manufacturing sector and a slower pace of expansion in services. This was confirmed by US GDP growing by an annualised rate of just 1.1% in the first quarter. This mixed economic data has encouraged markets to anticipate imminent Federal Reserve (Fed) rate cuts. At the end of April, markets anticipated 60bps (basis points) of rate cuts in the second half of this year, with another 140bps of cuts expected next year.