By Jack Kraft, CFA, Investment Strategist
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Stocks continued their forward march as investors had little catalysts to focus on last week. The path of least resistance remained upward as market participants enjoyed the quiet week of news and awaited upcoming key inflation reports. Typically, dull weeks with little to no news are bullish for stocks, and last week was no exception, with the S&P 500 rising 1.9% to mark its third consecutive positive week, retracing roughly 90% of April’s selloff. Elsewhere, the Dow had its best week of the year, rising 2.2%. The tech-heavy Nasdaq underperformed its peers, increasing 1.1% during the five-day stretch.
All 11 S&P 500 sectors finished last week in positive territory, with utilities and financials outperforming. The outperformance in utilities is notable, with the sector up nearly 7% this month alone. In fact, the sector closed at an all-time high for the first time in more than 400 days, which is the longest such stretch in more than 10 years. Another interesting fact supporting the sector is that whenever utilities break a streak of at least one year without reaching a new one-year high, the sector was higher a year later each time with an average gain of 10%.
Positive sentiment has helped ignite the sector as forecasts are calling for increased power demand amid the downstream effects of artificial intelligence. To put this in perspective, the use of a large language artificial intelligence model requires six to 10 times the amount of power per query as a traditional Google search. This is helping drive a surge in data center power demand, which is forecasted to account for 8% of the total U.S. power demand by 2030, up from only 3% today. This rapid increase in the demand for power can cause issues, such as power generation and transmission constraints, and will require significant capital investment from utility companies in the future. This could prove to be beneficial for some regulated utilities with increases to their base rate to offset this capital investment and the increase in electricity volume due to higher commercial demand for power.
Elsewhere, earnings season started to wrap up last week, with roughly 90% of companies in the S&P 500 having reported first-quarter earnings results. The main takeaway seemed to be positive by markets with S&P 500 constituents showing on average revenue growth of 4% and earnings growth of 5% year-over-year. That marked the strongest earnings period since the second quarter of 2022, according to JPMorgan. Additionally, this is the third consecutive quarter of growth, as calls for a recession or hard landing start to fade. Macro headwinds are also looking to be less of a focus, with companies mentioning words like “inflation” and “economic slowdown” considerably less during earnings calls. One common theme that has been on the rise is the mention of “AI” or “machine learning,” which was captured across 40% of earnings calls.
Drilling further down into the recent earnings reports, it looks like there is a healthy spread of growth across all 11 sectors. In fact, the S&P 500, excluding big technology, is expected to grow earnings by 7% this year and double digits in 2025. This upbeat view has led to a “catching up” of these stocks to the outsized returns of the Magnificent Seven (Nvidia, Apple, Amazon, Microsoft, Tesla, Google and Facebook) in 2023. In my view, this trend is likely to contribute to sustained positive gains for these smaller S&P 500 companies over the next two years. Earnings growth has consistently been the primary driver of returns throughout market cycles, representing approximately 70% of stock returns since 2020.
Shifting to the week ahead, investors will be busy digesting economic data releases. Inflation reports will be the highlight of the economic calendar with updates on April price increases. Consumer Price Index (CPI) data will be released Wednesday, with the street expecting no slowdown in price increases, as consensus estimates are calling for a 0.4% increase. Equity and fixed-income markets tend to be more volatile on days when inflation data is released, as investors try to gauge the path forward for central bank policy. This leads to the equity market swinging 0.7% in absolute terms on the day of the CPI release. Treasuries are also sensitive to the data, with the 10-year U.S. Treasury yield moving by 11 basis points in either direction. Other inflation data will also be in focus, with the Producer Price Index (PPI) providing key information about price increases in the manufacturing sector on Tuesday. Outside of inflation retail sales, import and export prices, and housing starts should garner attention.
On the earnings front, retailers will be in focus with Walmart (WMT), Target (TGT), Home Depot (Home Depot) and Ross Stores (ROST) set to report. Other notable names releasing earnings reports include Cisco Systems (CSCO), Deere (DE) and Applied Materials (AMAT).
Economic Calendar:
| Mon May 13 | Release | For | Expected | Prior |
| No economic releases | ||||
| Tue May 14 | Release | For | Expected | Prior |
| 6:00 AM | NFIB Small Business Optimism | Apr | 88.9 | 88.5 |
| 8:30 AM | PPI | Apr | 0.30% | 0.20% |
| 8:30 AM | Core PPI | Apr | 0.20% | 0.20% |
| Wed May 15 | Release | For | Expected | Prior |
| 7:00 AM | MBA Mortgage Applications Index | 11-May | NA | 2.60% |
| 8:30 AM | CPI | Apr | 0.40% | 0.40% |
| 8:30 AM | Core CPI | Apr | 0.30% | 0.40% |
| 8:30 AM | Retail Sales | Apr | 0.40% | 0.70% |
| 8:30 AM | Retail Sales ex-auto | Apr | 0.20% | 1.10% |
| 8:30 AM | NY Fed Empire State Manufacturing | May | -9 | -14.3 |
| 10:00 AM | Business Inventories | Mar | 0.00% | 0.40% |
| 10:00 AM | NAHB Housing Market Index | May | 51 | 51 |
| Thu May 16 | Release | For | Expected | Prior |
| 8:30 AM | Initial Claims | 11-May | 218K | 231K |
| 8:30 AM | Continuing Claims | 4-May | NA | 1785K |
| 8:30 AM | Housing Starts | Apr | 1440K | 1321K |
| 8:30 AM | Building Permits | Apr | 1488K | 1458K |
| 8:30 AM | Import Prices | Apr | NA | 0.40% |
| 8:30 AM | Export Prices | Apr | NA | 0.30% |
| 8:30 AM | Philadelphia Fed Index | May | 5 | 15.5 |
| Fri May 17 | Release | For | Expected | Prior |
| 10:00 AM | Leading Indicators | Apr | -0.30% | -0.30% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market