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Earnings season is drawing to a close, and a strange confluence of events is occurring: The economy is weakening, but corporate earnings are accelerating.
Some analysts believe this could mean good news for the stock later this year.
what’s happening: The past week has made it clear that investors are on edge, desperately searching for clues about what’s going to happen next, with even relatively insignificant economic data attracting outsized attention on Wall Street.
On Thursday, the Dow Jones Industrial Average plunged more than 600 points, its worst day so far this year. The Purchasing Managers’ Index for May rose 3.5 percent from the previous month, despite expectations of a slight decline. This suggested to investors that the Federal Reserve is unlikely to cut interest rates anytime soon, sparking a sell-off.
The PMI provides early insight into the economic health of manufacturing and services industries by surveying purchasing managers about business conditions. It’s a useful tool, but one that doesn’t get much attention on Wall Street.
Other data, such as the Institute for Supply Management report, is generally considered more comprehensive and influential.
The strong reaction to the PMI last week highlights the market’s current sensitivity to economic data as investors fret over the Fed’s interest rate decision. Even secondary economic indicators are shaping market sentiment and influencing investment decisions, as Wall Street worries that a stronger economic environment could keep interest rates higher for longer.
Yes, but: There’s an interesting dynamic at work as investors worry about corporate profits and a strengthening economy at the same time, Bank of America analysts wrote in a note on Tuesday.
Rising rates would raise borrowing costs and potentially hurt corporate earnings, driving down stocks as investors adjust their expectations for future growth and profitability. That’s the source of concern. But that’s not happening — at least not yet.
About 97% of S&P 500 companies have reported first-quarter profits so far. So far, those companies have beaten consensus earnings per share estimates by about 3%, according to Bank of America. Profits are up 7% from the same time last year, with all 11 sectors in the S&P 500 except for health care beating expectations.
There was some concern that companies might lower their outlook for the rest of the year, but overall, outlooks for the remainder of 2024 rose slightly in the quarter.
“The equity cycle feels different than the macro cycle today. [gross domestic product] “The labor market appears to be slowing, but earnings are accelerating,” Bank of America analysts wrote.
Historically, the backdrop for a slowing economy and accelerating earnings has been the best. They note that this is a favorable environment for the stock market, which could signal a stronger second half of the year for the market.
Yes, but, but: This also means there can be great sensitivity and extreme market volatility if economic data turns out to be stronger than expected, as we saw last week.
Still, the Fed is only part of the equation: BofA analysts wrote that goods and manufacturing make up about half of the S&P 500’s profits, but they account for less than 20% of the U.S. economy.
This means that if the manufacturing cycle is improving but services slow down, there could be a disconnect between market performance and the performance of the economy.
next: Meanwhile, attention is focused on Friday’s release of the U.S. Personal Consumption Expenditures Index for April, the Fed’s preferred inflation gauge. There are also some noteworthy earnings reports this week, including from Salesforce, Dell and Marvell. In the consumer sector, Dollar General and Costco make the list.
U.S. home prices hit a record high in March, reflecting the ongoing housing market’s lack of affordability.
The S&P CoreLogic Case-Shiller U.S. National Home Price Index, which measures home prices across the U.S., rose 6.5% year-over-year in March to a record high, marking the sixth time the index has reached a new all-time high in the past 12 months.
The report showed strong housing demand in densely populated cities such as San Diego, New York, Cleveland and Los Angeles. The 20-city index rose at a slightly faster pace in March than in February.
“This month’s report was another record high,” said Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices. “Over the past year, we’ve seen records repeatedly broken in both the stock market and the housing market.”
The housing market is plagued by persistently high home prices, a chronic housing shortage and rising mortgage rates, all of which have combined to make it a tough market, especially for first-time homebuyers.
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Apple Show to Siri you An old photo from your child’s second birthday, summarizing a long email, writing a draft, etc. And think about how Siri can learn your schedule, preferences, and even your personality to better communicate with you throughout the day.
As my colleague Samantha Murphy Kelly reports, generative AI — artificial intelligence that can provide thoughtful, thorough answers to questions or prompts — could breathe new life into Apple’s iPhone lineup at a time when competitors threaten to overtake Apple in the race to shape potentially world-changing technology.
The company is widely expected to partner with ChatGPT developer OpenAI ahead of its annual Worldwide Developers Conference in June, where it will likely show off the first suite of AI tools that will be included in its iOS software.
Artificial intelligence has long powered parts of the iPhone experience, like improved live text and autocorrection, but generative AI could enable new levels of interaction and personalization — all at a time when the company is under pressure to catch up with rivals like Google and Samsung. This technology is already being used in smartphones.
“We see generative AI as an important opportunity across our entire range of products and believe it will give us a differentiating advantage,” Apple CEO Tim Cook said during the company’s most recent earnings call in early May, noting that news was to be announced in the “coming weeks.”
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