Major U.S. stock indexes made new all-time highs with Wednesday’s lower inflation reading.

Highlights for This Week Include:

  • April’s CPI inflation report is consistent with cooling inflation while leading inflation indicators point to further progress ahead. However, inflation remains stubbornly above the Federal Reserve’s 2.0% objective, with the market now expecting just two interest rate cuts later this year.
  • April’s small business and retail sales reports are consistent with positive but slower economic growth.
  • Profits, which provide the ultimate support for stocks, continue to come in better than expected. Major U.S. stock indexes made new all-time highs with Wednesday’s lower inflation reading, while Treasury yields moved lower. Global stocks have also broken out to new highs, which supports a positive outlook.

Signs of Easing Inflation

After starting the year with higher-than-expected inflation readings, April’s CPI inflation eased modestly and came in better than consensus estimates. The Consumer Price Index (CPI) rose 0.3% in April, the smallest gain since January, and below the consensus estimate of 0.4%. Core CPI, which excludes volatile food and energy, also rose 0.3%, the smallest gain this year. On a y/y basis, CPI eased to 3.4% from 3.5% in the prior month, while core CPI came down to 3.6% from 3.8%, the lowest inflation rate since April 2021.

While inflation remains stubbornly above the Fed’s 2.0% inflation target, there are important reasons to expect further declines in inflation. Most of the inflation deceleration came from core goods prices, which fell 1.3% y/y, the steepest drop in two decades and led by lower auto prices. Goods deflation should continue with increased supply amid smoother supply chains, post-pandemic normalization in demand away from goods, and a drag on demand from higher interest rates and tighter credit conditions.

Wage inflation continues to move lower toward pre-pandemic levels while key commodities are below important levels. Shelter and auto insurance have prevented inflation from decelerating in previous months but leading indicators for them suggest easing ahead. New tenant rents, a leading indicator for shelter inflation, have decelerated at a fast pace, while auto insurance prices should stabilize in line with declines in vehicle prices.

Small Business Optimism and Retail Sales Suggest Further but Slower Economic Growth

The NFIB Small Business Optimism Index saw its first increase this year in April to a three-month high. Seven of the ten NFIB components improved last month, led by a less negative outlook for sales growth over the next three months. The earnings trend also improved slightly within its recent range. Importantly, current and expected price pressures eased from the prior month, although inflation continued to top the list of small businesses’ biggest problems.

Retail sales were practically unchanged in April, weaker than the prior month’s downwardly revised gain of 0.6%, and below the consensus of 0.4%. Some of it is a likely payback for the prior two months of strength, but it is also a tentative sign of weaker consumer spending early in the second quarter.

Retail sales growth is now in line with the pre-pandemic trend and is slower than last year, amid high interest rates, winding down of excess savings, and some signs of financial distress (rising delinquency rates) for low-end consumers. These trends suggest an outlook of slower future economic growth.

Earnings, Led by Technology, Coming in Better-than-Expected

With over 86% of the S&P 500’s market capitalization reported, expectations are now for earnings to grow by 10.0%. Earnings are beating estimates by 7.1% in aggregate, with 73% of companies topping projections. Earnings vary significantly among industries, with Technology and related firms showing significant earnings growth of 38% while Energy and Materials are lagging, with earnings falling 23% due to tough comparisons to last year.

Thoughts on Recent Stock Market Performance

Major stock market averages are at all-time highs with global stocks also making new highs. In support, Treasury yields continue moving lower in sympathy with lower inflation. Key commodities, including oil, remain below important levels, which supports the outlook for lower inflation. Meanwhile, the U.S. dollar continues to move lower, which is a risk-on signal, especially for global stocks. Importantly, stocks are ultimately supported by corporate profits, and earnings continue to come in better than expected, as discussed above.

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