Wentz Weekly: Better Earnings and Data than Feared and De-escalation or Trade Tensions

Wentz Weekly Insights
Busy Week With Better than Feared Earnings and Data and De-escalation of Trade Tensions

After a plethora of economic data and earnings reports last week stocks ended higher. In fact, U.S. stocks are riding a nine day winning streak, the longest in over 20 years. Since the lows during the session April 7, stocks have recovered 17.6% and are back above pre- “Liberation Day” levels from early April. While the concerns around tariffs and their impacts and overall fear in the markets may not be over, the rally shows why it is important to keep longer-term investment objectives in mind, especially during periods of volatility and drawdowns.

The S&P 500 gained 2.92% last week, the Nasdaq 3.42%, helped by better than feared economic data and earnings reports, and mostly driven by larger market cap companies – the equally weighted S&P 500 gained 2.65%. It was another risk-on week with cyclical sectors and the highly shorted stocks performing better.

In the fixed income markets, bonds were down slightly for the week but still roughly 2% higher year-to-date (compared to the S&P 500’s 3.3% decline). Credit spreads on high yield bonds have been cut in half since mid-April, suggesting risk has decreased and the bond market’s probability of a downturn in the economy has lessened. In the Treasury market, the 2-year yield rose 9 basis points to 3.83% and the 10-year yield rose 7 basis points on better than expected economic data.

It was a big data week that included the first estimate to first quarter GDP, labor market data for April, manufacturing data, and monthly income and consumer spending figures.

GDP, or Gross Domestic Product which measures domestic production, showed the economy contracted by 0.3% in the first quarter, worse than the consensus estimate but better than some of the worst estimates. The big issue with the quarter’s GDP is since it measures domestic production, imports to the U.S. will subtract from domestic growth. That was the reason for most of the first quarter’s decline as imports surged 41.3% due to companies’ efforts to get ahead of tariffs, which led to net exports subtracting 4.8% from the headline GDP number. A 1.4% decline in government spending, which we think will decline through the year as the Trump Administration continues its efforts to cut spending, did not help.

What was strong is what is core to the U.S. economy – consumers spending money. Consumer spending (which makes up 70% of our economy and GDP) rose 1.8%, although positive it was half the growth seen in Q4 2024. In addition, business investments increased 9.8% most likely due to the surge in AI related investments. We expect a potential bounce in Q2 GDP as imports decline, but are not optimistic the number will be strong the remainder of the year due to uncertainties affecting sentiment.

The employment report was much stronger than expected with 177,000 new payrolls for April, above estimates of 130,000 and the 12-month average of 152,000. Wages stayed in check, rising 0.2% in the month and up 3.8% over the past year, matching the prior months increase and just roughly 1% higher than inflation. The jobs market is strong and continues to support an economy that as of now is still growing.

Earnings was the next big story with last week seeing about 40% of the S&P 500’s market cap reporting. The highlights came from four of the seven Magnificent 7 companies. Big tech drove a lot of the market gains for the week, such as Microsoft’s 11.1% and Meta’s 9.1% gain. Microsoft had strong growth in its cloud division that houses its AI efforts, citing both non-AI growth and continued AI momentum, while providing a better than expected forecast. Meta’s results were also better than expected with positive takeaways on its improved monetization of AI and engagement. Both reaffirmed their AI spending plans.

However, Apple shares were lower after it reported mixed results – its iPhone sales were better than expected but its services segment (like its app store, Apple Music, etc) results were lower than expected and its guidance was lower than estimates. Amazon shares were roughly unchanged for the week as its results were mostly in line with expectations, but the street noted a deceleration in growth in its key cloud segments and tariffs impacting its profitability.

On the consumer side, Visa and Mastercard had better financial results and the takeaway was the consumer remains resilient, a positive read through for the economy.

Not only was it better data and earnings, but a de-escalation of tariff tensions as well. Early in the week President Trump signed an order for temporary relief for U.S. automakers, allowing automakers to claim an offset up to a certain limit. In addition, there were many reports and comments from Treasury Secretary Bessent and Commerce Secretary Lutnick that talked about trade conversations with partners that were ongoing and that several discussions have come close to a trade resolution.

Mexico, the largest trading partner to the U.S., said they had a very positive conversation with the U.S. and that discussions on improving trade relations will continue. While Bessent said trade representatives have put “China to the side” when it comes to prioritizing negotiations and it is up to China to de-escalate, saying they are focusing on 17 of the 18 major trading partners, it was reported later in the week that China was considering the possibility of trade talks with the U.S., with China’s Ministry of Commerce saying the U.S. had sent messages to China hoping to start trade talks, which China is currently evaluating.

While we have seen positive momentum in stocks, we expect volatility to remain. As we saw several weeks ago, tariff tensions could escalate quickly. We will continue to monitor all developments as well as monitor the impacts to the economy and if this turns into deteriorating economic data.

Recent Economic Data

• Employment Report: The Department of Labor employment report for April showed 177,000 new payrolls for the month, above the expectation of 130,000 and above even the most optimistic estimates. Most job gains were seen in education, health services, transportation/warehousing, leisure and hospitality, and government, while the industries that experienced job losses saw only small declines. The prior two months saw a net revision of 58,000 less jobs (102,000 in February and 185,000 in March). Other data from the establishment survey showed the average wage increased 0.2% in April and is up 3.8% over the past year, matching March’s increase. The household data showed the number of people employed saw a solid increase of 436,000 while the number unemployed increased 82,000 to 7.165 million, the highest since the economy was coming out of the recession and compares to the pre-pandemic trend of around 5.900 million. The unemployment rate was unchanged at 4.2% while the underemployment rate (referred to as the U-6 rate) fell 0.1% to 7.8%.
• ADP Payrolls: According to ADP data, private employers added 62,000 payrolls in April, about half of what was expected. It said education and health services, information, and professional services lost jobs while other sectors saw moderate growth. The Chief Economist of ADP said “unease” was the one word to describe the month.
• Job Openings and Labor Turnover Survey (JOLTS): The number of job openings on the last day of March was 7.192 million, falling nearly 300k from the prior week and down about 900k over the past year. Recall job openings peaked at nearly 13 million shortly after the pandemic and have declined back down to the pre-pandemic level of around 7 million. The report also showed the number of hires was 5.411 million, up 41k in the month and remaining in its recent trend, while the number of separations was 5.137 million, down 179k from the prior month and relatively unchanged over the past year. Within separations, the number of quits is also relatively unchanged over the past year.
• Employment Cost Index: According to the employment cost index, another report used by the Fed when measuring wage pressures, compensation costs for workers increased 0.9% in the first quarter of the year which was exactly as expected. Wages and salaries were up 0.8% while benefits costs were up 1.2%. Over the past year, compensation costs ticked down to a 3.6% increase, down from 3.8%, driven by a 4.4% increase in benefit costs and 3.5% increase in wages and salaries.
• Jobless Claims: The number of jobless claims for the week ended April 26 was 241,000, an increased of 18k from the prior week with the four-week average up 6k to 226,000. The number of continuing claims was 1.916 million, up 83k from the prior week and a new four year high.
• PMI Manufacturing Index: The PMI manufacturing index was 50.2, indicating manufacturing activity in April barely grew (a reading above 50 indicates expanding conditions while under 50 is contracting conditions). The survey respondents noted subdued growth in new work and a larger decline in output. Regarding tariffs, new orders were supported by domestic demand with export sales seeing a noticeable drop.
• ISM Manufacturing Index: The ISM manufacturing index for April was 48.7, below the breakeven level of 50, suggesting declining manufacturing activity across the U.S. The index was slightly lower than March’s 49.0, which came after two months of growth (and follows 26 months of declines). The report noted another drop in new orders, mostly from lower export orders, lower production, higher price pressure, and an improved employment picture, although still declining. Out of the 17 industries surveyed, 11 of them reported growth in April while six reported contraction.
• Factory Orders: U.S. factory orders increased 4.3% in March, right near expectations and compared to the 0.5% increase in February, largely driven by a 27.1% increase in transportation equipment as we saw in the prior week’s durable goods orders. Excluding transportation, factory orders declined by 0.2%. Shipments of previous orders declined 0.1% in the month, and were unchanged when excluding transportation equipment.
• Construction Spending: Construction spending in March declined a much wider than expected 0.5% (as compared to the 0.2% increase expected). The decline was due to a 0.4% decline in residential spending and a 0.5% decline in nonresidential spending. Compared to a year ago spending is up 2.8%, driven by a 2.8% increase in residential and 2.9% increase in nonresidential spend.
• GDP: According to the first estimate of GDP, the economy contracted 0.3% in the first quarter of 2025. However, much of this can be blamed on one category – imports. GDP, or Gross Domestic Product, is used to measure a country’s production, so when goods are imports to the U.S. it subtracts from GDP. Looking at the details, consumer spending slowed to a 1.8% increase, which was over half the increase seen in Q4 2024, and by making up around 70% of the weight in GDP, contributed 1.21% to GDP (spending on goods up 0.5% while spending on services up 2.4%). Business investments increased a significant 9.8% (most likely data centers/AI related) and contributed 1.3% to GDP. Residential investment (housing) increased 1.3% and contributed 0.05% to GDP. Government spending declined 1.4% with a 0.25% contraction to GDP. Exports increased 1.8% while imports increased 41.3% which led to net exports subtracting 4.83% from GDP. In theory, a surge in imports like this would lead to larger U.S. inventories and higher consumer spending, and that was only half the case in Q1. Inventory growth contributed 2.25% to GDP. Although GDP was negative for the first time since 2022, it appears the economy was still growing with solid consumer spending and investments.
• Personal Income and Outlays:
  • Personal income increased 0.5% in March, slightly above expectations, and follows another strong increase of 0.7% from February. Wages and salaries, the largest component of income, rose 0.5% as well and is up 4.5% over the past year.
  • Consumption (spending) increased 0.7% in the month and has increased 7.2% from a year ago, well above the rate of inflation. Spending on goods increased 0.9% in March while spending on services increased 0.6%, with each up 3.1% and 9.2% over the past year, respectively.
  • The personal savings rate fell slightly to 3.9%, a low level compared to historical averages.
  • The PCE price index, one of the most widely used inflation figures for economists, was unchanged in the month of March and is up 2.3% over the past year, higher than expected but coming down from 2.7% in February. The core index was unchanged and was up 2.6% over the past year, down from the 3.0% annual increase the month prior, both welcoming figures on the inflation front.