The S&P 500 was bid higher for a second-straight week to a level just 1.9% below its May 2015 all-time high, while most global indices remain well off their prior market highs. Of note in this rally has been more encouraging market breadth indicators including advance/decline ratios and stocks posting new 52 week highs. In prior recovery rallies since last May, we haven’t seen nearly the level of broad market participation we are seeing in this move. Last week’s move was accomplished despite a series of disappointing earnings reports and a backdrop of a significant rise in crude oil prices (+8.3%). U.S. interest rates also moved notably higher across the curve with two through thirty year maturities moving 0.10% to 0.15% higher.
Last week’s market action reflected both positive and negative anecdotes including a large number of first quarter earnings releases, FX movements, and a relatively light economic calendar. With approximately 20% of companies reporting, earnings are down 7.2% from last year at this time. The positive spin is that 63% of companies have beaten consensus bottom line estimates and 54% have beaten top line estimates, which are both very encouraging ‘beat rates’ relatively to the past several quarters. That said, companies are beating estimates that were significantly lowered over the past six months, creating a rather friendly hurtle for management to scale. Economic releases last week confirmed continued strength in both housing and labor markets. While housing starts slowed in the spring season, existing home sales were up an encouraging 4.8% during the first quarter. Also last week we saw the lowest weekly jobless claims figure since 1973, which is rather impressive given the much larger size of the labor force today.
This week’s FOMC meeting will likely garner much attention. While, no rate hike is expected this week, of interest is the divergence between June rate hike expectations of the Fed funds futures market relative to a recent Reuter’s economist survey. Futures markets are pricing in a 19% likelihood of rate hikes while 63% of economists surveyed by Reuters are projecting a hike.
