Market rally marches on, as do solid earnings results.
The rally is broad-based. This is best seen in the even-weighted outpacing the market-weight, along with small caps being stronger than large caps. A big driver of the current rally is AI, not so much the inroads of more efficient labor costs, but from the massive buildout of hundreds of data centers. It’s literally trillions of dollars in construction costs, power systems, cooling systems, and computer hardware, especially semiconductors. Semiconductors are up 30% YTD, +149% LTM.
Today, former board governor Kevin Warsh is beginning his testimony with the Senate Banking Committee before advancing to the full Senate for a majority vote confirmation. He is widely expected to be confirmed and to take over as chairman of the Fed from Jerome Powell when he retires on May 15th. Hopes remain that Warsh will find a rationale to lower interest rates sooner rather than later, to help the real estate and automobile markets, along with lowering the high cost of financing the huge federal debt balance.
The Iran conflict continues to be fluid. Negotiations are scheduled, then canceled, the Strait of Hormuz is open, then closed. Ships have been seized and boarded, and Iran continues to say that only ships with their permission may pass. Both sides say that they are ready to continue the fighting if an agreement isn’t reached. As a result, energy prices continue to drift higher, and the return to “normal” conditions in the energy markets remains uncertain and continues to be a serious inflation risk. On the upside, Trump is now requesting a $1.5 trillion defense budget for fiscal ’27, which if passed, will be stimulative, at least in the short term.
On the earnings front, UnitedHealth (UNH) had a big beat on the top and a solid beat on the bottom. The shares are up 7.6% (+5.4% YTD). GE Aerospace (GE) also had solid beats top and bottom, but the shares are constrained by high valuation and are down 6% today, -7.2% YTD, +60.2% LTM.
On the economic front, for March, expected to be strong, came in way above forecast. Headline sales were up 1.7%, the highest since Feb ’23. Core retail sales were even better; +1.9%, also the highest since Feb’23. While this is bullish for the economy and calms concerns about the consumer, it also hit interest rates by cutting expectations for a Fed cut. jumped 6bps, 5bps.
The trend remains positive, with continued good news on the earnings front as the near-term catalyst, and a resolution in Iran as the longer-term catalyst.