Last week, the three major U.S. stock indexes closed higher. On a weekly basis, the Dow Jones Industrial Average (DJIA) rose by 253.26 points, or 0.7%, to close at 38,239.66 points; the S&P 500 index increased by 132.73 points, or 2.7%, to close at 5,099.96 points; and the Nasdaq Composite (NASDAQ) surged by 645.89 points, or 4.2%, to close at 15,927.90 points.

Key Takeaways:
Stocks break losing streak, while tech stocks rallied
Slow progress on inflation means rates will stay high for longer

Between a barrage of earnings, the first-quarter GDP report, and the release of the Fed's preferred measure of inflation, investors had plenty to digest as markets continue to navigate a bumpy start to the second quarter.

Last week was the busiest of the earnings season, with about one-third of the S&P 500 companies reporting earnings, representing 40% of the index's market capitalization. So far results have been encouraging, with about 80% of the companies surprising to the upside and exceeding earnings expectations by 10%1. Given their outsized contribution to the index earnings, the spotlight was on the “Magnificent Seven” group of mega-cap tech names.

Profits for the Magnificent Seven are forecast to rise 47% in the first quarter from a year ago, comfortably exceeding the S&P 500’s 2% expected earnings growth2. Three of the four companies from the group that reported results last week moved higher (Tesla, Alphabet, Microsoft), with Alphabet being the standout after the company exceeded estimates and announced a dividend for the first time. But shares of Meta dipped, as the company delivered a lighter-than-expected revenue forecast while targeting higher capital spending to support AI.

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Eyes on Fed: Last week's initial estimates of 1Q24 GDP revealed a complex picture. At the start of the year, expectations were set for gradual declines in growth and inflation. However, the data showed a sharp deceleration in headline growth while inflation, as measured by the personal consumption expenditures price index (PCE), accelerated on a quarter-to-quarter basis. This has raised concerns about potential stagflation and its implications on interest rates and markets.

Looking at the details, first-quarter real GDP grew at an annualized rate of 1.6%, roughly half the pace of the previous quarter and below the Fed’s forecasts for 2024 and the longer term. However, volatile components like trade and inventories, which often swing up and down in consecutive quarters, significantly impacted this slowdown. As the chart of the week highlights, excluding those components, the economy grew at a healthy 3.1% rate — slightly above last year's average. This growth was supported by a strong labor market, evident from fewer jobless claims, which in turn bolstered consumer spending — rising by 2.5%, nearly aligning with its 20-year trend. This suggests that concerns over economic stagnation may be exaggerated, as the headline figure masked the underlying strength.

The Fed's preferred measure of inflation, the core personal consumption expenditures price index (PCE), was the last key datapoint on prices to be released for the month of March, and it confirmed the message delivered by the consumer price index (CPI) a couple of weeks ago. Progress toward the Fed's 2% target stalled in the first quarter, which, together with a resilient economy, means that policymakers have every reason to be patient with rate cuts.

Core PCE, which strips out the volatile food and energy components, increased 0.3% from the prior month and 2.8% from a year ago, holding steady from February. While elevated, it is still one percentage point lower than the core CPI because of the lower weight in housing (18% share in core PCE vs. the 43% share in CPI). Despite the rapid pace of price increases in March, it hasn't instilled confidence in the Federal Reserve. While recent reports still indicate a decline in inflation, it has turned into a very slow decline, tempering market expectations for rate cuts this year.