The End Is Nigh

On the macro front, the International Monetary Fund cut its global-growth projections and warned that risks are weighted heavily to the downside. In the US, the latest CPI report showed a big drop in headline inflation last month due to falling energy prices. Core inflation, however, accelerated to 5.6%, possibly cementing a 25-basis-point rate hike at the Fed’s next meeting in May, which traders reckon will be the central bank’s last. In fact, most central banks around the world may be either close to a peak or already done with their rate-hiking cycles, according to economists at Bloomberg.

On the equities front, new research last week showed that just 20 stocks account for almost 90% of the S&P 500’s more than $2 trillion gains so far this year. That’s puzzling when you consider that many of those stocks belong to Big Tech and that analysts are forecasting the steepest drop in quarterly profits for the tech sector since at least 2006. But it's not only Big Tech contending with falling earnings: US firms are facing their sharpest drop in profits since the early stages of the Covid-19 pandemic. Finally, in the digital assets world, bitcoin hit an important milestone last week by soaring past $30,000 for the first time since June 2022, following an impressive year-to-date rally of about 80%. Find out more in this week’s review.

Macro

In its quarterly update to its World Economic Outlook last Tuesday, the International Monetary Fund (IMF) trimmed its outlook for global economic growth, warning that stress in the banking sector is adding to pressures stemming from tighter monetary policy and the ongoing war in Ukraine. According to the IMF, global economic output is forecast to grow 2.8% this year and 3% next year, each 0.1 percentage point less than forecast in January and below the 3.4% expansion registered in 2022.

The fund warned that risks are weighted heavily to the downside, in large part because of the recent banking turmoil. While the IMF reckons that things are under control as of now, it’s concerned about a bigger economic downturn should financial conditions worsen significantly. The fund’s chief economist said that banks are already being a bit more prudent in extending loans, and that could weigh on economic growth in the US and the rest of the world. Finally, the IMF highlighted some additional risks beyond the financial sector, including inflation taking longer than expected to slow, China’s reopening faltering, and/or a worsening of the Russia-Ukraine war.

Speaking of inflation, the latest US CPI report out last week showed consumer prices increased by 5% in March compared to the same time last year, which was good news for several reasons. First, it was below the 5.1% expected by economists. Second, it was the lowest reading in nearly two years. Third, it marked a sharp slowdown from February’s 6% annual rate, which makes sense considering that the figure is being compared with March 2022, when energy prices spiked immediately after the Russia-Ukraine conflict broke out. But it wasn’t all sunshine and rainbows: core inflation, which strips out volatile energy and food components, accelerated in March by 0.1 percentage points to 5.6%, highlighting the sticky nature of underlying inflation.

On a month-on-month basis, headline and core consumer prices increased by 0.1% and 0.4% (economists had predicted a 0.2% and 0.4% gain respectively). Overall, while the big drop in the headline figure will be welcomed by the Fed, inflation remains well above its 2% target. And the acceleration in core inflation, meanwhile, will surely make the central bank uncomfortable. That’s why traders are still largely betting on a 25 basis-point increase in interest rates at the Fed’s next meeting in May, which they reckon will be the central bank’s last rate hike.

In fact, most central banks around the world may be either close to a peak or already done with their rate-hiking cycles. See, as the first signs of a slowdown in economic growth and stress in the banking sector emerge, the Fed’s decision to pause its rate hikes after at least one more increase in May could solidify a shift away from the most aggressive monetary tightening the world has experienced in decades. From Brazil to Indonesia, a pivot toward rate cuts could start as soon as this year, with many developed-world central banks not far behind.

Stocks

After a tough 2022, US stocks are staging a comeback, with the S&P 500 up by more than 5% so far this year. But the advance is far from broad-based: according to new research by Apollo Global Management, just 20 stocks account for almost 90% of the S&P 500’s more than $2 trillion gains so far this year. Many of those stocks belong to Big Tech, underlying the heavy sector concentration in one of the financial world’s most influential stock market indexes.

Big Tech’s rally comes as instability in the banking sector drives down traders’ interest rate expectations, boosting the attractiveness of mega-cap growth stocks (whose valuations are particularly sensitive to changing interest rates). In fact, the banking sector’s recent turmoil has pared more than half a percentage point off the level at which investors expect rates to peak.

However, investors are starting to question whether this year’s 20% rally in US tech stocks looks a bit overdone. After all, the rally is at odds with analyst calls for the steepest drop in quarterly profits for the sector since at least 2006. Analysts estimate US tech earnings plunged 15% in the three months through March, with companies hit by high costs and slowing demand. And according to a recent poll by Bloomberg, nearly 60% of the 367 investors surveyed said that the recent bounce in the tech sector’s shares had nothing to do with earnings expectations. That is, the rally is not necessarily being driven by company fundamentals, but by hopes that the Fed will start cutting interest rates as a recession becomes evident.

It's not only the tech sector that is expected to experience a decline in profits, but the broader market as well. In fact, firms in the S&P 500 are expected to report a 6.8% decline in first-quarter earnings compared to the same period last year, according to analyst estimates compiled by FactSet. That would be Corporate America’s biggest fall in profits since the more than 30% plunge in the second quarter of 2020, when Covid-19 led to a widespread economic shutdown. The main culprit this time round is a combination of weak consumer demand (= lower sales) and high inflation (= shrinking profit margins).

Analysts had higher expectations ahead of the quarter, predicting just a 0.3% decrease in profits back in December. Although earnings forecasts typically decrease over a quarter, the decline in this instance was greater than the average of the past five years, and comes after many companies signaled weakness in the first quarter (78 firms issued negative EPS guidance, for example).

Crypto

Bitcoin hit an important milestone last week by soaring past $30,000 for the first time since June 2022, following an impressive year-to-date rally of about 80%. The world’s largest cryptocurrency has easily outperformed other major asset classes and, crucially, has vaulted past where it stood when crypto-focused hedge fund Three Arrows Capital imploded last summer. However, bitcoin remains more than 50% below its all-time high in November 2021. The strong year-to-date rally has been attributed to three key factors: 1) expectations that central banks will soon pause or even reverse their rate-hiking cycles; 2) a growing narrative that the digital coin offers an alternative to traditional finance amid the recent turmoil in the banking sector; and 3) a drop in bitcoin’s liquidity to a 10-month low (with lower trading volume, price swings can become more dramatic).

This week

• Monday: Nothing major.
• Tuesday: China GDP (Q1), Chinese retail sales (March), UK labor market report (March). Earnings: Bank of America, Goldman Sachs, Johnson & Johnson, Netflix.
• Wednesday: UK inflation (March). Earnings: Morgan Stanley, IBM, Tesla.
• Thursday: Japan trade balance (March), US existing home sales (March). Earnings: American Express, AT&T, Blackstone, Snap.
• Friday: Japanese inflation (March), UK retail sales (March), and Japan, UK, US, and eurozone PMIs (April). Earnings: Procter & Gamble.