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Despite geopolitical uncertainty, equities surged, with the S&P 500 rebounding 10.5% in April and recovering prior declines to restore positive year-to-date performance.
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Solid economic data and AI optimism powered markets higher, with large technology companies once again leading.
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Broad earnings strength persisted, with high margins and continued growth across sectors, reinforcing equity gains despite concerns around consumer sentiment and rising costs.
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Rising oil prices increased inflationary pressures, reducing expectations for near-term rate cuts despite solid economic growth and leadership changes at the Federal Reserve.
Stock investors who either held steady through April’s fluctuations or wrote off the early weeks of our conflict with Iran as a passing or inconsequential phenomenon were rewarded as the S&P 500 rose 10.5%, reversing the losses of March as the year-to-date return bounced back to 5.7%. Both the NASDAQ and S&P 500 hit new all-time highs during the month. While oil prices and daily stock valuations fluctuated with the fortunes of war and the oscillating news regarding the Strait of Hormuz, the underlying strength of the U.S. economy, corporate earnings, and labor market supported the steady upward trend for the stock market. Optimism over the productivity boost from artificial intelligence (AI) proved to be the main engine for the market as big tech once again took the lead. Earnings reports at month end were strong for these companies, even as the enormous spending on AI infrastructure gave some investors pause.
The earnings story was particularly powerful, overcoming at least for the moment the potential liability of sharply higher gas prices and lagging consumer sentiment, which hit new all-time lows during the month. Corporate earnings for the first quarter were on track for double-digit year-over-year gains for the sixth-straight quarter. S&P 500 companies reported a blended net profit margin for Q1 of 13.4%, the highest in more than 15 years. While the gains in the Tech sector were significant, positive earnings surprises came from a variety of sectors, including Industrials, Health Care, and Materials. Large oil companies stand to join the earnings winners as they benefit from higher crude and gas prices, which could remain elevated for some time, even if the conflict in the Middle East is settled.
As higher oil prices percolate through the economy, expectations for future rate cuts have continued to drop, in spite of the shift in leadership at the Federal Reserve. Chairman-in-waiting Kevin Warsh is presumed to be more dovish than Powell. However, the broad inflationary effect of gasoline prices in the midst of a healthy economy (Q1 GDP growth was a solid 2.0%) lowers the likelihood of imminent rate cuts. Warsh has also championed reducing the Fed’s balance sheet, which ballooned during and following the financial crisis of 2008. Doing so without disrupting the delicate liquidity issues in the short-term markets remains a challenge.
The conflict in the Middle East and the disruption of commerce in the Persian Gulf have worldwide ramifications. The impacts are complex. For instance, as oil prices rise, other commodities that may seem unconnected also tend to rise. We’ve witnessed jumps in the prices for copper and aluminum. Few companies are unaffected by the rise in input and transportation costs. We are carefully monitoring the web of effects and our holdings’ ability to adjust to new conditions. The strength of corporate moats and the excellence of management are two qualities we value in our holdings and believe make them well-suited to weather the complications that are likely to persist or even escalate over the remainder of the year.