Weekly Newsletter April 20th to April 24th
RECAPPING LAST WEEK
With the exception of the Nasdaq-100’s 2% pop, U.S equity markets were mostly flat, with no other index moving even 1%. We would expect to see some consolidation after the multi-week April rally, with the S&P500 up nearly 12% from its March 30 low. While Nasdaq stars the Magnificent 7, and shared in the sector’s gains, they were not driving outperformance. Instead, semiconductor strength carried the tape, helped by Intel’s strong revenue outlook and a broader chip rally. Oil remained central to the macro narrative, with WTI crude rallying 12%. While oil eased Friday on hopes for renewed U.S.-Iran diplomacy, Middle East supply concerns related to the Strait of Hormuz chokepoint have kept prices elevated. Interest rate yields drifted higher and expectations for Fed rate cuts continued to fade as observers recognize that the Fed faces a complicated path navigating higher oil prices and geopolitical risk. March retail sales surged 1.7%, their best monthly change in more than a year, signaling that higher gas prices have not yet led the American consumer to cut their discretionary spending. Housing demand aligned with retail spend, with pending home sales 1.5% higher despite rising mortgage rates. Manufacturing and services PMI registered expansion above 50, pushing the S&P Global Composite PMI to 52. Jobless claims ticked up to 214K—not high enough to stoke additional labor market concerns. Consumer sentiment fell near the bear-market lows of 2022, even as equities today are registering new record highs. The preceding numbers still reflect a great deal of uncertainty, both from the ongoing war in Iran and from the incoming Fed Chair Kevin Warsh. His “regime change” testimony in front of the senate last week has caused concern about future policy direction. As has been the case since the start of the war, global markets looked fragile compared to the U.S. The German flash composite PMI fell to 48.3 and the sinking IFO Business Climate Index indicated the direction of corporate sentiment. Consumer sentiment in the eurozone dropped to a 3-year low. In the U.K., unemployment rose to 5.2% as CPI rose to 3.3%, reminding investors that inflation is omnipresent. Japan’s core inflation accelerated to 1.8%, as businesses reported the fastest-ever recorded increase in selling prices, and manufacturing activity started to slow. Australian PMIs crossed back into expansion, but here too, inflation surged to a 4-year high.
THE WEEK AHEAD
The chief macro event risk at the moment relates to the Fed—the impact of this week’s meeting will likely come more from the statement and press conference than the rate decision itself. Will policymakers emphasize sticky inflation, oil-driven price risk, still-resilient growth, or any opening for future rate cuts? Despite rising yields, firmer energy prices, and a steady drumbeat of headline risk, equity indices managed to keep rolling higher last week. Still, their Sisyphean climb is slowing as each policy post and diplomatic flare-up adds a few pebbles’ weight to the boulder. On the domestic front, labor market data and forward-looking metrics from retail sales and PMIs will help assess whether growth remains resilient or if any knock-on effects from spiking energy costs are filtering through. Thursday features the Fed’s preferred metric for inflation, core PCE. Advance GDP q/q, and weekly unemployment claims arrive as well. On the earnings front, megacap technology earnings will be the equity-market stress test: Microsoft, Alphabet, Amazon, Meta, and Apple are expected to report, providing investors with a direct referendum on AI capex, cloud demand, margins, and whether these stocks’ index leadership can continue. Internationally, global central banks meet this week with Japan, Canada, and the U.K. all making rate statements and Wednesday morning a release of EUR M3 money supply. Keep an eye on European data to see if their sluggish activity continues, and more importantly how the ECB reacts to it. It will all be greatly impacted by what happens in Iran, the Strait of Hormuz, and energy prices
CHART OF THE WEEK
Knock your SOX off
While the Philadelphia Semiconductor Index (SOX) has been screaming higher for the better part of the past year, its dramatic rise the past month still stands out. It surged 10% last week, 50% since the March 30th low, and 215% from the low a year ago. Investors increasingly question whether the Magnificent 7’s massive AI-related capital spending will ultimately generate sufficient returns to justify the buildout, particularly in the case of the semiconductor companies that have the greatest exposure to that investment cycle. Still, the SOX constituents have directly benefited and show no signs of abating. Despite seemingly unlimited demand, the earnings multiples look surprisingly low compared to other large cap tech companies. The index price and its MACD below are both at all-time highs, the 40-week EMA (blue line) provided ideal support, setting up April’s rally, and the Fibonacci extension target appears to sit above $12K. Capital isn’t exiting the AI space, but it is rotating through it —and for now, semiconductors are the main beneficiary.
Source: Charles Schwab Corporation
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