Will The Shorts Capitulate?

* Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

DJIA 52-wk: +6.83% | YTD: -2.88% |  Wkly: +3.00%

S&P 500 52-wk: +10.90% | YTD: -3.31% | Wkly: +2.92%

NASDAQ 52-wk: +11.27% | YTD: -6.90% | Wkly: +3.42%

Microsoft 52-wk: +7.04% | YTD: +3.27% | Wkly: +11.08%

U.S. equities experienced a robust rally, with all major indexes posting significant gains:​

• S&P 500: Closed at 5,686.67, up 1.5% on Friday and approximately 3.4% for the week.
• Dow Jones Industrial Average: Ended at 41,317.43, rising 1.4% on Friday and about 3.2% for the week.
• Nasdaq Composite: Finished at 17,977.73, gaining 1.5% on Friday and roughly 3.4% for the week.
• Russell 2000: Closed at 2,020.74, up 2.3% on Friday and approximately 3.1% for the week.​ AP News

This marked the ninth consecutive day of gains for Wall Street, the longest winning streak since 2004. ​AP News

Strong Employment Data: The U.S. added 177,000 jobs in April, surpassing expectations and alleviating recession concerns. ​The Times UK

Easing Trade Tensions: Signs of potential U.S.-China trade negotiations emerged, with Beijing considering talks on recent tariffs, boosting investor confidence. ​The Guardian

Corporate Earnings: While some companies withheld forecasts due to tariff uncertainties, overall earnings were optimistic, contributing to market gains. ​Reuters

Technology: Apple reported increased sales driven by its low-end iPhone 16e but warned of a $900 million cost impact from tariffs, leading to a 3.7% drop in shares. ​WSJ

Consumer Discretionary: Duolingo's strong earnings led to a 22% stock surge, while Instacart (Maplebear) saw a 14% rise on higher sales. ​WSJ

Energy: Exxon Mobil and Chevron reported weaker earnings, reflecting challenges in the sector. ​WSJ

FTSE 100: Achieved a record 15-day winning streak, buoyed by optimism over U.S.-China trade talks and strong U.S. job data. ​The Times UK

Eurozone: Reported robust GDP growth, contrasting with the U.S.'s unexpected contraction, highlighting regional economic divergences. ​Reuters

GDP: The U.S. economy unexpectedly contracted for the first time in three years, primarily due to a record negative impact from trade. ​Reuters

Inflation and Consumer Sentiment: Mixed signals persist, with concerns about stagflation and weak consumer sentiment potentially indicating future market turbulence. ​Reuters

Key Takeaways from the April Jobs Report

Job Growth: The U.S. economy added 177,000 nonfarm payroll jobs in April, exceeding the forecast of 133,000. ​WSJ

Unemployment Rate: Remained steady at 4.2%. ​WSJ

Sector Highlights:

• Healthcare: Led job creation with 51,000 new positions, particularly in hospitals and ambulatory services.

• Transportation and Warehousing: Experienced notable growth, likely influenced by pre-tariff activities.

• Financial Activities and Social Assistance: Also saw employment increases.

• Federal Government: Employment declined by 9,000 jobs, reflecting ongoing cuts. ​Market Watch.

• Wage Growth: Average hourly earnings rose by 0.3% to $36.00, with a 3.8% increase over the past year. ​Engage2Excel

Mohamed El-Erian, former Pimco CEO, described the report as "solid," indicating U.S. economic resilience amid uncertainty. He noted that the data likely precludes a Federal Reserve rate cut in the near term.

Economists' Caution: While the job growth figures are encouraging, some analysts warn that the data may not fully capture the impact of recent tariff announcements and policy shifts. Businesses are reportedly adopting a cautious approach, potentially pausing hiring due to supply chain concerns and economic instability. ​WSJ

Market Reaction: The positive jobs report contributed to a rally in stock markets, with major indices posting significant gains. ​The Guardian

U.S. Treasury Secretary Scott Bessent on Thursday said the market was sending a signal that the Federal Reserve ought to lower interest rates.

"We are seeing that two-year rates are now below fed funds rates. So that's a market signal that they think the Fed should be cutting," Bessent said in an interview on Fox Business's "Mornings with Maria" segment.

The U.S. 2-year Treasury yield (US2Y) was last up 4 basis points to 3.66%. Meanwhile, the federal funds rate currently has a target range of 4.25%-4.50%.

Fed chair Jerome Powell in April indicated that policymakers were happy to hold interest rates steady while considering further economic data. The central bank chief also hinted that U.S. President Donald Trump's tariffs could bring the Fed's dual-mandate goals "in tension."

Trump for his part has criticized Powell for being too slow to lower rates.

The Fed's monetary policy committee will be issuing its third interest rate decision of the year next week. It is widely expected to take no action.

"There's been a substantial decrease in the 10-year since the beginning of the year, but especially since January 20th. And President Trump and I are targeting that point on the curve," Bessent said in the Fox Business interview.

The 10-year Treasury yield (US10Y) was last up 4 basis points to 4.21%. It has retreated 36 basis points since January 20, Trump's inauguration day.

The U.S. fixed-income market underwent much turbulence in April after Trump's "Liberation Day" reciprocal tariffs announcement. A bruising selloff in longer-term maturities in particular sent yields soaring, with some chalking it up to foreign countries such as China dumping U.S. bonds.

"The interest rate market was moving around substantially in April. I think that was a lot of my former Wall Street brethren going through the occasional what's called a 'bar shock.' They got too much leverage, and they have to de-lever," Bessent said.

"Few weeks ago, when the 10-year was at 3.90%, all I heard was 'well, Secretary Bessent got what he wanted, the 10-year is down, but it's down for the wrong reason.' Then it spiked up to 4.50%, 4.55% - oh, we're on the verge of a bond meltdown," the Treasury Secretary said.

"And it just turned out that it was some overleveraged market players. Now we're continuing on the downward path," he added.

S&P EARNING REPORTS TO DATE:

A little more than 350 S&P 500 INDEX companies have reported results this earnings season, with more than 75% beating consensus earnings-per-shares estimates and about 60% exceeding sales estimates.

The AI Trade Is Showing New Signs of Life. What We Learned From Big Tech Earnings.

During a stretch of just 36 hours this past week, we learned more about the state of tech tariffs and artificial intelligence than perhaps we had in all three months prior. That’s thanks to a quick succession of earnings from

Microsoft

MSFT

+2.32%

Meta Platforms

META

+4.34%

Apple

AAPL

-3.74%

Amazon.com

AMZN

-0.12%

While all four companies reported better-than-expected earnings, the stock reactions following their results underscored that, in a global trade war, digital bits win over atoms. Shares of Microsoft and Meta Platforms both surged following their results, while Apple and Amazon underperformed.

Apple CEO Tim Cook said tariffs would add about $900 million to the company’s costs for the June quarter. Amazon CEO Andy Jassy said the company had yet to see significant impact from the levies.

That said, both Apple and Amazon sell many physical products and couldn’t give much clarity about the potential tariff impact for the rest of the year.

Beyond tariffs, the reports offered an important update on artificial intelligence: The reports of its demise have been greatly exaggerated.

Heading into earnings season, some on Wall Street were worried that companies would reduce their plans to spend hundreds of billions to build out AI infrastructure this year. Concern about return on investment, combined with economic weakness, led some to think the big AI spending trend was done. Not even close.

In fact, spending is actually picking up. The fundamental story around AI hasn’t changed. AI demand continues to accelerate beyond expectations. And the so-called hyperscalers all still plan to invest aggressively.

On Wednesday, Microsoft said it was increasing European data center capacity by 40% over the next two years, putting to bed speculation that the software giant was cutting back overseas. The company also reaffirmed its prior guidance to spend $80 billion on data center capacity this fiscal year ending in June.

Microsoft said it has been capacity-constrained for Azure AI services, meaning the company doesn’t have enough AI GPU servers to meet demand. Microsoft said it would remain supply-constrained beyond June, which is longer than management expected. That is clear evidence of robust AI demand from enterprises.

In the biggest surprise of the week, Meta went a step further than Microsoft and boosted its already hefty 2025 capital expenditures forecast to a range of $64 billion to $72 billion versus a prior outlook of $60 billion to $65 billion. And that still may not be enough.

Even with its increase in AI computing capacity, Meta Chief Financial Officer Susan Li said the company doesn’t have the resources to meet the demand of its internal AI projects.

On the earnings call with investors, Meta CEO Mark Zuckerberg laid out a clear vision for five areas where he sees big opportunity for AI: improved advertising outcomes; new types of interactive content; a WhatsApp for customer support and sales; voice conversation and more personalized recommendations; and, finally, better devices. Zuckerberg sees a huge number of people wearing AI-enabled glasses within five to 10 years.

“We don’t need to succeed in all of these areas to have a good ROI,” Zuckerberg said, using the shorthand for return on investment. “But if we do, then I think that we will be wildly happy with the investments that we are making.”

Similarly, Amazon sees potential for AI to transform all parts of its operations. It’s already using AI to improve productivity in fulfillment, e-commerce, and advertising. “We’re not dabbling here,” Jassy said on the earnings call. “As fast as we actually put the capacity in, it’s being consumed.”

Jassy said the company’s AI business was growing at more than 100% year over year, a figure that would be higher with more capacity. Jassy sounded especially optimistic about the potential for AI agents, which are programs with the ability to take simple directions and complete multistep tasks.

Jassy cited two start-ups using agents to code that are suddenly significant Amazon Web Services customers, the type of demand that wasn’t foreseen even a few months ago.

“I would say we’re not even at the second strike of the first batter in the first inning. It is so early right now,” Jassy said.

Of course, a prolonged trade war could change everything. Sales at large technology companies would eventually be affected as consumer spending and enterprise tech budgets all deteriorate.

Even then, AI might thrive. In times of uncertainty, smart companies with long-term horizons invest to gain market share. Earlier this year, Nvidia CEO Jensen Huang said that if there is a recession, companies would shift more investment toward AI because it’s an area with the most promise and a source of potential efficiencies.

Zuckerberg agrees. During downturns, “I’m going to do things like build out even more GPU infrastructure to serve businesses and people better,” he said in a Stratechery podcast interview this past week.

AI increasingly looks like a once-in-a-generation paradigm shift for computing. Even a recession may not bring it to a halt.

Factors I’m focusing on this week:

1) Around 90 S&P companies report this week, including Palantir

2) Monday: S&P final U.S. services PMI, ISM services

3) Magnificent Seven, Semi’s & Financial names

4) FOMC

The rally gets more difficult from here. I couldn’t fault investors for taking some profits on a percentage of their holdings. However, I’m not in that camp. I’m more in the camp of using stop orders to protect my profits and letting the upside play out.

LONGSHOT CALL: Powell is under serious pressure from this administration. A real case could be made to lower interest rates. Maybe a 10-15% chance, but I wouldn’t rule it out.

-Richie

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