Market Analysis: GDP and Inflation Impact Stock Market
Introduction:
Last week, the Commerce Department released its preliminary first-quarter GDP estimate, revealing a slower-than-expected growth rate of 1.6% annually. This figure fell short of economists’ consensus estimate of 2.5% annual growth. Additionally, the core Personal Consumption inflation index rose 0.3% in March and 2.8% in the past year. These figures initially caused a significant drop in the Dow, but the market managed to recover most of the losses by the end of the week.
Earnings Drive Market Recovery:
Despite the disappointing GDP and inflation data, the market rebounded due to strong earnings reports from companies like Spotify. Spotify’s first-quarter sales increased by 18.3% to $3.95 billion compared to the same quarter last year. The company also surpassed analysts’ expectations by posting operating earnings of $1.05 per share, compared to a loss of $1.27 per share in the previous year. This impressive performance led to a 64% earnings surprise, boosting investor confidence.
Market News Highlights:
1. Eli Lilly’s Impressive Performance: Eli Lilly emerged as a market leader last week after reporting a 26% rise in first-quarter revenue. The company’s weight loss drugs, Mounjaro and Zepbound, experienced booming sales, prompting Eli Lilly to raise its full-year revenue guidance to $42.4 billion to $43.6 billion. This upward revision is $2 billion higher than the previous guidance and exceeded analysts’ expectations. Additionally, the company raised its full-year earnings guidance above analyst estimates, further bolstering investor optimism.
2. Super Micro Computer’s Dominance: Super Micro Computer, Inc (SMCI) demonstrated exceptional growth in its latest quarterly revenue, which surged by 200.8% to $3.85 billion compared to the same period last year. The company’s success in the liquid-cooled AI chips market for data centers contributed to this remarkable performance. Looking ahead, Super Micro Computer raised its fiscal 2024 revenue guidance to a range of $14.7 billion to $15.1 billion, with operating earnings expected to be between $23.29 and $24.09 per share. These figures surpass analyst consensus estimates, making the stock an attractive investment opportunity.
Impact of a Strong Dollar on Small and Mid-Cap Stocks:
The strength of the U.S. dollar due to high Treasury yields and the Federal Reserve’s reluctance to cut interest rates in June presents an interesting conundrum. As approximately half of the S&P 500’s revenue comes from outside the U.S., a strong dollar poses challenges for multinational companies. Consequently, institutional investors tend to shift their focus towards domestic companies, boosting their allocations to small and mid-cap stocks. This trend provides potential opportunities for growth in these market segments.
Consumer Confidence Decline:
The Conference Board’s latest consumer confidence index revealed a significant drop to 97 in April, down from a revised 103.1 in March. This marks the third consecutive monthly decline and the lowest level since July 2022. Dana Peterson, chief economist at the Conference Board, attributed this decline to consumers’ concerns regarding future business conditions, job availability, income, and elevated prices for food and gas. President Biden’s reelection chances have also taken a hit, as reflected in a CNN poll that showed his approval rating reaching an all-time low.
Earnings Season Outlook:
Despite some concerns arising during this earnings season, we are only halfway through, and there is still room for recovery. The market continues to bounce back from its recent correction while considering the likelihood of delayed and fewer Federal Reserve interest rate cuts. If the upcoming week brings generally positive earnings results and guidance, we can expect the market to regain its momentum and potentially reach new highs, provided geopolitical risks remain stable.
Conclusion:
The stock market displayed resilience in the face of disappointing GDP and inflation data, primarily driven by strong earnings reports from companies like Spotify. Eli Lilly and Super Micro Computer also delivered outstanding performances, surpassing expectations and raising their guidance. However, consumer confidence declined significantly, reflecting concerns about future business conditions and rising prices. As we navigate through earnings season, positive results and guidance will be crucial in propelling the market towards previous highs, as long as geopolitical risks remain contained.
