What a Difference a Day Makes

Stocks opened higher this morning, reversing recent trend. The Dow is up 197 points and the S&P 500 is up 1.1%. Tech stocks are especially hot in the wake of earnings announcements by Alphabet (GOOGL) and Microsoft (MSFT). Bonds are in rally mode as well. One of the most widely held, diversified funds—iShares Core US Aggregate—is up .25%.

Today’s rally flies in the face of yet another report from the Bureau of Economic Analysis (BEA) confirming a modest uptick in inflation. Remember, higher inflation is supposed to lead to lower stock & bond prices. The Federal Reserve’s favorite measure of consumer price growth—”PCE Deflator”—ticked up to an annual rate of 2.7% in March vs. 2.5% in the prior month. The “core” PCE, which excludes food & energy, held steady at 2.8%. Prices for certain things like auto insurance, healthcare and housing just won’t stop rising.

As I mentioned in yesterday’s post, higher inflation data cause short-term traders to pout because they’re myopically focused on timing of the next Fed rate cut. But today, bigger and more important forces are driving investment markets. First, the BEA also told us that consumer incomes are rising at a 4.7% clip, and spending is up 5.8% from year-ago levels. In other words, the economy is holding up quite well and maybe we don’t need interest rate cuts for a little while.

Second, we just got blow-out earnings from a couple of mega-cap tech companies. Microsoft (MSFT) reported first quarter revenue growth of 17% and earnings-per-share growth of 20%. The Azure clouding computing business grew 31%, with about 7 of those percentage points coming from AI (vs. 6 in the prior quarter). About 60% of Microsoft’s Fortune 500 customers are now using the its Copilot AI service. The stock is up 2.5% this morning.

Alphabet (GOOGL) reported excellent first quarter results including 16% revenue growth, and the highest operating profit margin in nearly three years. Growth accelerated in search advertising, YouTube, and cloud computing. Additionally, management announced its first ever dividend and a massive stock buy-back program. My favorite investor reaction comes from Josh Brown of Ritholtz Wealth: CFO Ruth Porat showed that “this is not a kindergarten for random science experiments. And it’s not a social justice exercise. It’s a business focused on profitability and making money for shareholders.” The stock is up 10% this morning.