Positive Tone Heading into Summer

May 2024



Things are good. No, really — they are! As we head toward Memorial Day and the unofficial start to summer, the season of proms, graduations and backyard barbecues, our outlook for the U.S. economy and U.S. markets is positive.

After pulling back in April, the major equity indices have bounced back so far in May. As of filming, the S&P 500 is flirting with the 11% level year to date. The Dow Jones Dividend Select Index is back to about 8%, and the MSCI All Country World Index moved above 9% for the year.

Let's review what's driving these moves.

Messaging from the Fed that further rate hikes are unlikely reassured investors and calmed the markets from the April jitters, but more impactful was that earnings remain a source of support. With almost 90% of companies reported, 78% are beating estimates. First-quarter earnings are up about 5% year over year, powered by double-digit gains from the communication services, technology, utilities and consumer discretionary sectors.

Particularly encouraging has been the 4% revenue growth indicating demand is holding up, with gains spread across cyclical, growth, and defensive sectors. Profit margins have also been solid, signaling companies are benefiting from the ability to manage elevated costs.

Over the course of April, second-quarter estimates have also increased, marking the first time in 2+ years that estimates have risen during the first month of a quarter. This is good news — of all the variables out there, corporate earnings are a key driver in eventual stock gains.

The good vibes apply to fixed income as well. The Bloomberg U.S. Aggregate and the Bloomberg Municipal Bond blend indices are all positive month to date, making up some ground after a bumpy start to the year. This is encouraging, given the higher for longer than expected rate environment.

Expectations for an eventual rate cut continue to be pushed out, which means that opportunities to lock in relatively attractive yields remain for those looking to establish or increase fixed-income allocations.

In short, the bond market is open for business.


Sources: FactSet, CNR Research, as of April 30,  2024. 
Indices are unmanaged, and one cannot invest directly in an index. Information is subject to change and is not a guarantee of future results. .

Chart 1: 2:38— Now, before I'm accused of being Pollyannish, we do have some concerns. Equity valuations and geopolitical risk remain at the top of our list. Regarding valuations, the aforementioned earnings growth certainly helps. Also, recall prior months' comments on the broadening market breadth. So far, the magnificent seven tech stocks have not driven returns like they did in 2023. However, they are driving the S&P 500’s price-to-earnings ratio into extended territory.

Ex the Magnificent 7 tech stocks, the remaining S&P 500’s 12-month forward PE ratio is not far from the 15-year average.

S&P 500 Performance
After Select Geopolitical Shocks


During or six months prior to recession

The stock market’s longer-term reaction ultimately is more impacted by the strength of underlying economic fundamentals.
Sources: FactSet, as of February 2024.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
Past performance is no guarantee of future results.

Chart 2 3:21— There's no denying that geopolitical risks are heightened. Two wars rage on, and U.S./Chinese relations remain strained. What is important to note is the strength of the underlying U.S. economic fundamentals, which are key during periods of heightened tensions. When strong, the S&P 500 tends to be relatively resilient. Concurrent recessionary risk is important as well. Recall, City National Rochdale thinks that a soft-landing, slow-growth scenario is the highest probability.

In short, we think it is unlikely that geopolitical risk meaningfully impacts U.S. economic activity or the long-term path of the U.S. stock markets. We continue to avoid international equities for now, given a less resilient outlook and those geopolitical concerns. Keep an eye on economic data releases, especially CPI and PPI reports for inflation, and data pertaining to labor and consumption. These will be closely watched by the Fed and ultimately determine the timing of rate cuts.

Potential rate cuts are bullish, and the markets will be forward looking. Maintain a focus on the U.S., on quality, and look to extend fixed-income duration opportunistically.

Important Information


The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness.


While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management's view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.


Past performance or performance is no guarantee of future results.


All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market.


City National Rochdale, LLC, is an SEC-registered investment adviser and wholly owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank and City National Rochdale are subsidiaries of Royal Bank of Canada.


© 2024 City National Rochdale.  All rights reserved.


Index Definitions


The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.


The Dow Jones U.S. Select Dividend Index aims to represent the U.S.'s leading stocks by dividend yield.


MSCI All Country World Index (ACWI):The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance.


The Bloomberg US Aggregate Bond Index measures the performance of investment grade, US dollar-denominated, fixed-rate taxable bonds.


The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.


The Magnificent 7: The seven companies commonly recognized for their market dominance, their technological impact, and their changes to consumer behavior and economic trends: Alphabet (GOOGL; GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA).


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