Almost half of the companies in the S&P 500 have reported quarterly earnings with 78% surpassing analyst expectations, compared with a long-term average of 67%, according to LSEG data.

 

With the US market near its most concentrated in history, earnings for the “Magnificent 7” were crucial to markets.

 

Three of the four that reported were well received (Tesla, Microsoft, Alphabet), with only Meta disappointing – here’s more:

 

Alphabet beat expectations for revenue, operating income and EPS. It also announced its first ever dividend and an additional US$70 billion buyback.

 

Microsoft beat consensus EPS expectations and highlighted the growth of its cloud computing business and its efforts to bring AI technology to clients.

 

Tesla missed on revenue ($21.3 billion versus expectations for $22.3 billion) and earnings estimates for Q1, noting that “vehicle volume growth rate may be notably lower” in 2024 than in 2023. However, investors were upbeat on the company’s strategy going forward, with a focus on “accelerating” the rollout of new, cheaper models. There are some interesting potential parallels between EVs and today’s enthusiasm for AI. Three years ago, EVs - and Tesla in particular - were expected to take over the world. However, competition has been intense in the sector (especially from China) and demand disappointing in some regions.

 

Meta saw lighter revenues and higher expenses and capex as it looks to spend more on AI. 2Q24 revenue guidance was below consensus. There is a concern that advertising revenue is slowing due to geopolitical events.

 

 

The Q1 3.6% twelve-month growth in Australian CPI slowed from 4.1% in Q4 2023, but by less than the 3.5% expected. Nearly half of Australia’s CPI basket rose at an annualised rate of more than 3% in the March quarter. Several components appear to be sticky, notably in domestic market services lifted by rents, insurance and education costs.

 

Rental prices rose 2.1% for the quarter, in line with low vacancy rates across the capital cities. Rents continue to increase at the fastest rate in 15 years.

 

The two things that the RBA focuses on – employment and inflation – are both above target, with the recent unemployment rate 20bps below the RBA’s forecast (3.9% vs 4.1%) and the trimmed mean inflation now 20bps above (1.01% vs 0.8%). On any measure, underlying inflation in Australia remained well above the RBA’s target in Q1.

 

In Australia, while there has been much talk of a resumption of rate hikes after the hot March quarter inflation data, our view remains that the RBA will leave rates on hold on Tuesday ahead of a delayed start to cuts later this year.

 

 

In sum, the GDP print suggested ongoing economic strength in the US.

 

The combination of sticky inflation and economic resilience raises the question of whether the neutral rate is as low as the Fed and market previously thought and, by extension, whether policy settings are as restrictive as assumed. Our conclusion remains that while the Fed retains its current “hold” bias, there is a skew towards looking for reasons to cut rather than reasons to raise rates.

 

The market’s implied expectations of a rate hike this year have fallen back below 10 per cent.

 

The problem for the stock market is that rates seem too high to allow equities to push through to higher levels, but not high enough to create the kind of economic slowdown that forces the Fed to ease.

 

Chinese business conditions PMIs were mixed in April. Manufacturing conditions were little changed, whereas services fell. These numbers bounce around a bit but suggest that while the acceleration in growth may have petered out it’s not bad either. Meanwhile the April Politburo meeting signalled more policy support, particularly for property. This suggests more easing ahead but in recent times policy stimulus has been less than flagged.

 

Shares to remain messy for a bit. While global shares have bounced and Australian shares have stabilised since their April lows following a 4 to 5% correction, it’s still too early to say the correction is over as valuations remain stretched, sentiment is not at bearish extremes, uncertainty is high regarding the outlook for interest rate cuts and the risks regarding the Israel/Iran conflict remain high. The gains in global and Australian shares over the remainder of the year are likely to be more constrained and more volatile than was the case in the first three months of the year.