NEI Monthly Market Insights: April 2023

May 16, 2023

Markets tread water amid growth and inflation uncertainty

There isn’t much evidence of a looming recession, but the debate about whether the central banks can achieve a soft landing continues. Economic growth remains positive albeit at anemic levels. Strength in the labour market makes a strong argument that we’re in for a gentle touchdown. Inflation, however, remains significantly above target with pressure coming from wage and shelter inflation.

Equity markets had a positive month as the S&P 500 was up 1.8% in April, bringing its year-to-date returns to 9.3%, while the Nasdaq was up 0.25% for the month. Equity markets were up across in the board in Europe, the U.K, Canada, and Japan, while China and Emerging market equities were down for the month. While fixed income markets also ended the month positively. U.S. and Canadian 10-year yields gyrated by more than 30bps to end the month about 10bps lower. Global fixed income index returned 0.5%, while the Canadian fixed income index was up by 1.0%.

The NEI perspective

Recession? What recession? Despite many expecting a hard landing as the predictable outcome of aggressive tightening policy, the April U.S. unemployment figures and other strong economic data makes it difficult to see a recession in the near-term, though tightening financial conditions could still impact markets.

Earnings beat gloomy expectations as 53% of S&P 500 companies that reported results by the end of April, 79% of them reported a positive earnings per share (EPS) surprise and 74% reported a positive revenue surprise. The actual decline in earnings was 3.7%, vs estimated earnings decline at 6.7%.

Index concentration is at record levels thanks to mega cap companies’ outsized impact on the index. The top seven mega cap stocks have accounted for nearly 90% of the S&P’s 2023 gains. For perspective, the 10 largest stocks in the S&P 500 now make up 28.7% of the total weight of the index.

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