Commentary
US equities saw notable gains last week, with all major indices closing the week in green. Positive investor sentiment was primarily produced by improved prospects for the US debt-ceiling negotiations. While President Biden ensured there will be no default on government debt, Republican speakers called the deal regarding debt-ceiling “doable”.
Another important catalyst for the current equity rally is unexpected strength of corporate earnings that, on average, surprised on the upside. Despite a lower than expected growth in 1Q23 US GDP, the corporate profit margins stood at stunning 11.8%, the level which has rarely been observed in the past. High margins were supported by resilient consumer spending, particularly in leisure service (e.g., travel and dining). Moreover, the outlook for costs-side has also improved, as companies are actively looking to optimize expenditures, including on human and capital resources.
On the flipside, the retail sales in April have grown by half the speed anticipated (0.4% m/m vs 0.8% forecast). As retail data is reported nominally, the sales have contracted strongly in real terms.
Lastly, it is important to note that this year’s rally in US equities is almost solely attributed to multiples growth. This was underlined by market expectations on Fed rate cuts, which may prove too dovish in near future. In such case, earnings growth would be the only possible driver for equity markets.
