| | Close
May 8 | Close
May 1 | Weekly
Change | Net Weekly
Change % |
DJIA | 49,609.16 | 49,499.27 | +109.89 | +0.22% |
Nasdaq | 26,247.07 | 25,114.44 | +1,132.63 | +4.51% |
S&P 500 | 7,398.93 | 7,230.12 | +168.81 | +2.33% |
| S&P TSX | 34,077.76 | 33,891.18 | +186.58 | +0.55% |
Source: Globe & Mail
Equities: You Are What You Earn
Robert Kavcic
BMO Senior Economist
Many are wondering why the equity market is holding up
despite challenges imposed by tariffs and high oil prices. Truth is, those
factors have just been a leash holding the bulls back to a steady run, versus
what would otherwise be a full-on stampede. Macro conditions since equities
bottomed around late-2022 have been characterized by firm economic growth and
an acceleration in productivity; which has expanded profit margins and driven
earnings growth; all while we’ve seen disinflation allowing the central bank to
ease policy. That’s the recipe for a bull market. Tariffs and oil shocks
directly push back on almost all of that, but the raw strength has been enough
to keep the market moving. Earnings especially have been on a tear, and that
performance has only strengthened into 2026.
We’re almost 90% of the way through the 2026Q1 reporting
period, and S&P 500 earnings are on pace to grow a massive 29% y/y.
Forward-year expectations have similarly ratcheted up. In fact, the current
earnings performance has been so strong that, despite a 30% rally in the
S&P 500 over the past year, valuations on a forward-looking basis have not
expanded. What’s driving it? Final private domestic demand (mainly consumer
spending and business investment) in the U.S. economy is firm, growing 2.5% y/y
in real terms as of Q1, and a hefty 5.6% y/y in nominal terms. The AI boom has
driven combined spending on software, computer/peripheral equipment and data
centres to above $1.3 trillion per year, up 25% from a year ago, plus all of
the offshoots.
This does raise some concerns about concentration. First,
note that earnings among the S&P 100 large caps has surged by more than 50%
since the start of 2023, while that for the S&P 600 small caps has actually
contracted. In general, the bigger they are, the faster they are growing.
Meantime, the Wall Street Journal highlights that profits for the Mag-7 alone
will be up 61% y/y this quarter, versus growth of just 16% for the remaining
493 companies.
Concentration of profit growth, either related to the AI
boom or company size, is real. Even so, those remaining 493 companies are still
posting double-digit profit growth across financials, consumer discretionary
and industrials, among others; and smalland mid-cap growth has now started to
keep pace. While domestic demand (i.e., the top line) has held steady, firms
have generally also been able to protect or expand margins. Cost pressure,
either through tariffs or higher energy prices, can be more readily passed on
in an environment where demand is firm. And, productivity gains are also
suppressing unit labour cost growth and padding margins. Real output per hour
has grown almost 3% annualized over the past three years—pandemic distortion
aside, we’ve only recently seen performances like that very early in the cycle,
or during the 1990 tech boom.
The Bottom Line: The equity bull market has been rooted in
macro fundamentals. While we might be losing the tailwinds of disinflation and
Fed easing, the earnings support is still very much there.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX added 0.6%, with gains in materials offset by
declines in technology and energy. Many are wondering why the equity market is
holding up despite challenges imposed by tariffs and high oil prices. Truth is,
those factors have just been a leash holding the bulls back to a steady run,
versus what would otherwise be a full-on stampede.
The Bank of Canada’s April 29 meeting revealed more than
usual despite the as expected on-hold decision. Or, to be precise, Governor
Macklem’s statement did. He highlighted scenarios in which rates could go lower
(e.g., to support growth if tariffs increase further) or higher (e.g., to
combat inflation if oil prices remain elevated). However, the latter could come
with “a need for consecutive increases” (emphasis added) since the overnight
rate is already at the bottom end of the BoC’s neutral range. We’ll be looking
through the Summary of Deliberations for more clues that point to this hawkish
tilt. We judge that the Bank would need a few bad CPI reports to prompt a hike,
and we’re still a long way from that—recall, the momentum in core inflation has
been disinflationary since late last year, while subdued demand could limit the
pass-through of higher costs. For now, we continue to expect the BoC to remain
on hold through 2026.
The spring buying season provided little boost to Canada’s
lacklustre housing market in April. Nationally, we expect sales ticked up from
March but remained about 2% below year-ago levels. Average prices are expected
to be little changed from year-ago levels, while the quality-adjusted MLS HPI
could be down 4% y/y. Beyond the seasonal support, the market remains balanced
although regional differences persist. Softness in Southern Ontario is a key
outlier, while smaller-to-medium-sized cities in Quebec and Atlantic Canada
remain tight, albeit less so over the past year. Affordability is a key concern
stopping the market from gaining meaningful traction, especially given elevated
economic uncertainty.
YTD, the TSX is up 7.46%, and the benchmark 10-year yield ended the week to yield 3.50%.
U.S. & Global
Equity markets rose last week as investors continue to brush
aside uncertainty in the Middle East and focus instead on robust profit
numbers. The S&P 500 rose 2.3%, led by a 7% rally in technology. U.S. consumer inflation is expected to run hot
again in April as a second month of the closure of the Strait of Hormuz sends
retail gasoline and diesel prices soaring to their highest levels since 2022.
We forecast a 0.7% increase in the CPI, only a slight moderation from the 0.9%
jump in March. Retail gasoline prices increased another 13% on average in
April, according to the Energy Information Administration, compared to a 25%
surge in March. Meantime, the ISM Manufacturing Prices Paid index rose another
6 ppts in April to 84.6, its highest level since April 2022 (and a 26-point
jump since the beginning of the year). The comparable services measure was
unchanged at an elevated 70.7. From a year ago, CPI inflation is expected to
increase to 3.8% in April from 3.3% in March and a benign 2.4% in February.
YTD, the DJIA is up 3.22%, the NASDAQ is up 12.93%, and the S&P 500 is up 8.08%. The 10-year Treasury yield ended the week to yield 4.35%.
Source: BMO Capital Markets
The Good:
Merchandise Trade Balance swung to a $1.8 bln surplus
(Mar.)—strong energy exports Ivey PMI +8.0 pts to 57.7 (Apr.).
The Bad:
Employment -17,700 (Apr.); Jobless Rate jumps 0.2 ppts to
6.9% (Apr.); Auto Sales -3.9% y/y (Apr.).
The Good:
Nonfarm Payrolls +115,000 (Apr.); Jobless Rate steady at
4.3% (Apr.); Average Hourly Earnings +0.2% (Apr.); Auto Sales 16.1 mln a.r.
(Apr.); Factory Orders +1.5% (Mar.); New Home Sales +7.4% to 682,000 a.r.
(Mar.); Construction Spending +0.6% (Mar.); Consumer credit +$24.9 bln (Mar.);
NY Fed 5-Year Inflation Expectations steady +3.0% y/y (Apr.)—but still
elevated.
The Bad:
Productivity slows to +0.8% a.r. (Q1)—and Unit Labour Costs
+2.3% a.r.; Job Openings fell to 6,866k (Mar.); Initial Claims +10k to 200k
(May 2 week); Goods & Services Trade Deficit widens to $60.3 bln (Mar.);
ISM Services PMI -0.4 pts to 53.6 (Apr.); Global Supply Chain Pressure Index
jumps to 1.82 (Apr.)—highest since 2022; U of M Consumer Sentiment -1.6 pts to
48.2 (May)—fresh record low and inflation expectations stay elevated.
Wierd News
Source: Associated Press
Rare two-colored lobster caught by fishermen off Cape Cod
donated to aquarium
It might be a divided lobster, but it has united New
Englanders in fascination.
A Cape Cod seafood company has donated a rare two-colored
lobster to a science center, sparing the critter from the kettle because of its
remarkable coloration. The lobster found is the typical brown color on one side
and bright orange on the other, and the two-toned pattern goes all the way from
its head to its tail.
Representatives for Wellfleet Shellfish Company in Eastham,
Massachusetts, said Monday they have been fielding inquiries about the
crustacean for days. The company gifted the lobster to Woods Hole Science
Aquarium in Falmouth, Massachusetts, and it will be put on public display when
the aquarium reopens, the company said.
“The lobster is now with Woods Hole Science Aquarium’s
animals currently being housed in holding tanks at the Marine Biological
Laboratory during the aquarium’s construction period. When the aquarium
reopens, the lobster will be on display, offering visitors a rare look at one
of the ocean’s most striking natural anomalies,” the shellfish company said in
a statement.
Fishermen caught the lobster off Cape Cod on April 16. Oddly
colored lobsters often make their way to New England’s docks over the course of
the spring and summer, but the two-colored specimen is rarer than most.
The American lobster is usually a mottled brown, but they
can experience color abnormalities due to gene mutations that affect the
proteins that bind to their pigments. Some are blue or orange, some are spotted
calico and others are so brightly color they’re called “cotton candy” lobsters.
A two-colored lobster can occur because two lobster eggs
fused and grew as one animal, marine sciences professor Markus Frederich of the
University of New England in Maine told The Associated Press in 2024. There are
estimates about the rarity of different lobster colors, though Frederich has
also cautioned that such figures are approximations.
On Cape Cod, Wellfleet Shellfish Company said it’s treating
the two-colored lobster as a “remarkable and exciting find.”