Monthly CIO Update | May 2024

Market Wrap

April proved to be a challenging month for equity markets, with major indices giving back some ground after posting three straight months of gains to start the year. Concerns surrounding the Fed’s willingness to ease monetary policy were exacerbated by economic data suggesting stubborn US inflation and resilience in private demand. After closing at a record-high at the end of March, the S&P 500 fell 4.1% inApril as valuations came under pressure from rising bond yields. The NASDAQ andDow Jones Industrial Average followed suit, declining 4.1% and 4.4%, respectively.

Companies missing Q1 estimates continue to be punished as the market looks for earnings to justify any stretched valuations.However, in our view, the economic backdrop remains supportive to corporate earnings. 77% of reporting companies have beat Q1 consensus EPS expectations and the blended earnings growth rate for Q1 S&P 500 EPS currently sits at 5.0% vs. 3.4% expected at the end of the quarter.

On the sector level, only Utilities delivered positive results in April, but Energy and Consumer Staples outperformed as well. The shift in interest rate expectations was particularly visible in long duration and rate sensitive sectors with Technology and Real Estate sinking 5.8% and 8.5% respectively.

Fixed Income markets also suffered from the hawkish repricing of Fed rate-cut odds with Treasuries notably weaker. One and a half rate cuts were priced out of the market in April alone, with the timing of the first cut pushed out to later in the year. Treasury yields increased sharply by more than 45bps across 2Y, 3Y, 5Y, 7Y, 10Y, 20Y and 30Y maturities while front-end yields remained largely unchanged.

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Investment Outlook

EQUITIES: With no new economic projections from the Fed until June, mega cap tech earnings are in focus. The market has set the bar high and while early results have skewed positive, we are monitoring the fundamentals closely for thesis-shifting signs of weakness. We remain overweight the most impactful theme of the year: AI. However, we’re positioning for AI adoption to broaden beyond obvious tech beneficiaries into additional sectors (healthcare, financials) and applications (data centers, power generation, etc.).

On the sector level, we are targeting defensive opportunities including consumer staples and utilities where we find valuations attractive on a relative basis, particularly if economic conditions worsen. We have maintained exposure to energy, which we believe could benefit from upside inflation surprises while also serving as a buffer to geopolitical risk.

FIXED INCOME: Overall, we are concentrating exposure within short and intermediate term bonds vs. long-term. We find 5%+ yields along the front end of the curve particularly attractive given continued compression in the equity risk premium, inflation uncertainty, and heightened bond market volatility. While high yields further out the curve hold some appeal for us, when the Fed Funds rate is above4%, short duration has historically outperformed the long-end of the curve on a risk-adjusted basis.

MACRO: Our base case remains that a softening labor market and the eventual reemergence of disinflation will precipitate the long-awaited Fed pivot and a 25bps cut ahead of the 2024 election. However, we don’t rule out the possibility of persistent inflation forcing a delay in easing until 2025.

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Inflation Update

Core Inflation is comprised of three categories: Services, Housing and Goods. Last year’s disinflation was driven mostly by the abatement in Goods inflation; however, Services and Housing have proven stickier than real-time readings initially suggested. This is primarily due to lags in housing data as well as a labor market that appears unfazed by elevated interest rates (for now).

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