Global Weekly: New high for S&P 500 Index

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Equities had a solid week with a new all-time high for the S&P 500 Index, backed by not-as-bad-as-expected first-quarter earnings results and higher oil prices.

As the S&P 500 Index surpassed it former 2018 high of 2930, the Euro Stoxx 600 is still more than 10 points away from its 2018 high of 402. The outperformance of the US versus Europe since 2009 continues in 2019, with a 3% higher return in the US, backed by stronger growing and more profitable companies.

The first-quarter earnings season really kicked-in this week. So far, with 40% of the US companies having reported, on average, we see that they have 5% higher-than-expected earnings and have beaten sales estimates by 0.5%. In Europe, the first impression is very weak. With almost 20% of companies having reported, we see, on average, 7% less earnings than expected and 0.5% less in expected sales. Although it is still very early to draw conclusions, the figures coming from the consumer staples and financials sectors have been the most disappointing.

The stock price of SAP jumped by more than 13% on very strong new cloud-computing bookings with improving margins. It looks like they are finally catching up, as companies move their software to the cloud and start with artificial intelligence solutions. The same story is true for Microsoft (+4%) which reported strong bookings for their Azure Cloud business. Facebook’s shares were up by 7%. For the second quarter in a row, monthly Facebook users increased (+8% to 2.38 billion). This comes after the big data breach last year with Cambridge Analytica. Facebook’s possible fine (USD 3 to 5 billion) from the US Federal Trade Commission is lower than expected.

Facebook continues to transform its business to a privacy-centric model. Nokia declined by almost 10% on pricing pressure for their 5G equipment, as competition increased. Oil jumped by 4% to USD 66 (WTI) after the White House said it will scrap waivers that allowed the purchase of some Iranian crude. Energy shares rallied alongside crude prices.

Bonds: Volatility is off for the moment

Financial markets have apparently decided not to read the April 2019 International Monetary Fund (IMF) report, “World Economic Outlook: Growth Slowdown, Precarious Recovery.” In this long document, the IMF points to a list of concerns, such as the fragility of the financial environment, the growth (higher than in 2008) of corporate debt in developed countries, multiple imbalances in the Chinese economy and real estate bubbles.

The market’s positive attitude is fueled by the extreme generosity of central banks and their leaders’ ability to deliver a comforting speech. This, in turn, leads investors to believe that whatever the disease might be, the central banks will have the remedy.

One could speculate that some corporates are opportunistically timing their refinancing strategies to benefit from these supportive market conditions before volatility joins the party as a surprise guest later on this year. Some of the latest macro data in Europe has been giving some signs of economic weakness, especially in the manufacturing sector. The Ifo Index, measuring the German business climate, for example, dropped to 99.2 in April versus 99.7 in March, and missing forecasts for a slight improvement to 99.9. In France, confidence in manufacturing fell to its lowest level in almost four years. But, in the US, data remains robust and is driving overall growth.

Regarding fixed income performance, year-to-date investment-grade credits reached 5.2% in the US and 3.6% in Europe, while high yield keeps on breaking records with 8.5% for the US and 6.8% in Europe, with nearly positive returns every single week since the beginning of the year. During last week, spreads in Europe and the US moved sideways, due to the long holiday weekend. Overall, spreads are back to where they were in October 2018, shortly before concerns and fear hit the market. This seemingly stable environment and appetite for risk, should not make us forget that the current risk/reward level is on the negative side, with current spreads below the average spreads of the last 20 years.

In the short run (3-6 months), with the economy supported by central banks, low inflation and an overall resilient growth context pulled by the US economy, we believe that there is room for spreads to further tighten when compared to early 2018 (record low). However, negative news flow could swiftly trigger volatility that could reach late-2019 levels.