Executive summary:
- Results from U.S. first-quarter earnings season are tracking well above consensus expectations
- UK and Australian bond yields rose in the wake of hotter-than-expected inflation numbers
- We believe a September rate cut is still possible in the U.S.
On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Equity Manager Research Analyst Michelle Batjargal discussed the results of first-quarter earnings season around the globe. They also unpacked key drivers behind the recent volatility in government bond yields in the UK, Australia, and the U.S.
Strong Q1 earnings season for the globe
Batjargal and Eitelman began by reviewing the numbers from first-quarter earnings season, which is wrapping up globally. Eitelman said that generally speaking, the results have been strong, characterizing the first quarter as a period of fundamental strength for the global economy and markets.
In the U.S., year-over-year earnings growth for the S&P 500 Index is tracking around 11%, he stated, noting that’s well ahead of what consensus expectations called for just one month earlier. The growth is being predominately driven by the so-called Magnificent Seven group of mega cap tech stocks, Eitelman said, stressing that AI (artificial intelligence) darling Nvidia in particular reported phenomenal first-quarter results as well as strong forward guidance.
He noted that there’s also been an encouraging stabilization in broader corporate profitability among other S&P 500 companies. “Notably, what I call the S&P 493—all the companies in the index outside of the Magnificent Seven—is also back to positive earnings growth again,” Eitelman remarked. He added that there’s been some stabilization in the profits of smaller-cap U.S. companies too.
Globally, the same theme of a broadening out in fundamental strength is applicable as well, Eitelman said, noting that Europe in particular has seen some meaningful positive surprises in corporate earnings.
What’s driving the rise in bond yields in the UK and Australia?
The conversation pivoted to the recent volatility in government bond yields, with Batjargal remarking that yields on sovereign debt have generally ticked up since mid-May in key developed markets. Eitelman said hotter inflation readings are the likely culprit in a handful of countries, including Australia, the UK and Germany.
For instance, in Australia, the country’s consumer price index (CPI) rose 3.6% in April on a year-over-year basis, exceeding expectations for a 3.4% increase, he said. “This was the largest increase in the inflation rate in Australia in five months, and has caused market participants to push back the timeline for potential Reserve Bank of Australia (RBA) rate cuts,” Eitelman stated. In the UK, April’s inflation rate of 2.3% was lower than the prior month, but likewise slightly higher than expected, he added. “Markets now think it’s pretty unlikely that the Bank of England (BoE) will cut rates in June, as previously expected,” Eitelman remarked.
Meanwhile, in the U.S., 10-year government bond yields are up about 20 basis points from their May 15 low, as of market close on May 30, he noted. Eitelman said a weaker Treasury auction on May 28 is one likely reason for this, with less investor demand for new bonds than expected. However, he cautioned from reading too much into the uptick in yields, noting that market liquidity is always a little lower following U.S. holidays, including Memorial Day, which was observed on May 27.
“I still believe that the U.S. will be on a disinflationary path as the year continues,” Eitelman said, noting that the nation’s annual core inflation rate fell to 3.6% in the most recent CPI report. Over time, this should allow the U.S. Federal Reserve (Fed) to start lowering rates, he remarked, adding that he sees September as the most likely time for an initial rate cut.