What will be the next big catalyst for growth after earnings season?

As stock indexes (^DJI, ^IXIC, ^GSPC) surge to new record highs, many on Wall Street attribute this market momentum to some of the more fundamental principles, especially the strength of the recent earnings season.

As major earnings reports come and go, Schroders Multi-Asset Americas Director Adam Farstrup sits down with Yahoo Finance Catalysts to talk about the market’s shift toward artificial intelligence, the Federal Reserve’s inflation outlook and prints inflation, including Friday’s Personal Consumption Expenditure Index (PCE) report.

“And when we look outside the United States, we actually see improvements in PMIs (purchasing managers’ indexes) in Europe. So it’s not that we have a strong production cycle, but that it has fallen from the bottom, says Farstrup. “We are looking at the ECB (European Central Bank) likely to cut interest rates before the Fed in the summer. We think this could create some optimism for Europe and Japan.”

For more expert insights and the latest market action, click here to watch the full Catalysts episode.

This post was written by Luke Carberry Mogan.

Video transcription

All right.

Well, the Dow is leading stocks to move or markets are falling this morning, Treasury yields are also heading higher following Tuesday’s sovereign debt auction fiasco.

The market moves reflect concerns that the Fed will keep rates higher for longer.

So what is the next catalyst that could push markets higher?

Let’s talk to Adam about this because he’s the junior head of the multi-tasking Americas division.

Great to have you here, Adams.

Let’s talk about the current dynamics as we are close to the markets.

Yesterday the NASDAQ closed at a record high and we have it set up.

We have seen some price volatility amid expectations for Fed rate cuts.

So what does this setup look like for markets heading into summer?

So, you know, I think, first of all, it’s nice to be here.

The story continues

Thank you very much.

Uh, I think when you look at the markets, what really excites us is the earnings strength that you saw in the first quarter, right?

Or rather, if you look at 2025.

We don’t see any profit cuts yet.

Typically this time of year, next year’s earnings start to decline a bit as analyst expectations change based on, um, corporate guidance.

So I think earnings can really move the market and that’s what we need given the valuations.

Could this continue to drive the market in the short term?

Given that we are at the tail end of earnings season, it appears that, at least in the very short term, the focus has almost shifted to either valuation or near-term expectations.

Of course, this is a bit more of a wild card.

I think a lot of the catalysts on the corporate earnings side have been missed.

So we see that the focus on economic prints is on inflation prints.

That is why there is such a reaction to yesterday’s auction on the bond market.

And you know, there’s been a lot of talk about potentially expanding the market beyond the large-cap names beyond the mag seven.

Where do you see this widening?

And what will be the main reason for this, especially as we enter the second half of the year.

So I think the market will be looking for signs that all this investment in AI is benefiting the top players in the market.

Will we start to see a return to this in corporate earnings?

Will companies actually be able to use large language models and deep learning all these tools to start making their businesses more efficient?

I think this could be an important next step for the markets.

And when we start looking outside the United States, we will see, you know, we actually see a revival in the premier market in Europe.

So it’s not like we have a strong production cycle, but it’s just a matter of the bottom.

We assume that the ECB is likely to cut interest rates before introducing monetary policy in the summer.

This may be optimistic.

We’re looking at going into Europe and Japan as we move forward and internally, I think it’s about a specific sector here, when you talk about broadening the rally or broadening participation, where do you expect to see the greatest strength or the greatest opportunity at least at this point?

In terms of opportunities, I don’t have a very good view of the sectors, but I would expect that manufacturing and the commodity cycle could be very interesting here.

Hmm. We’re seeing consumer pressure at a low level, but outside the United States, as China starts to recover on the manufacturing side, which is kind of coming through the pipeline.

We have PCE inflation data due out on Friday.

This is the Fed’s preferred measure of inflation and comes after we have seen a rebound in consumer confidence.

What are your expectations for Friday and what might it look like in early June?

Bright.

I mean you have equal expectations.

Will it be soft?

Will it be hot?

That is, so the consensus expectation of 0.3 uh at this rate, P ce, regardless of whether we get a hot print or a soft print, the reality is that last-mile inflation will take some time for us to come down, and the system federal is I won’t react, right?

So the feds won’t change their trajectory if you get a soft print.

Let’s say we arrive at 0.25 on Friday.

I don’t think this changes the Fed’s narrative.

It’s actually a series of data printouts.

Do we see labor markets returning to balance?

Do we see this kind of inflation trend reaching the point where the Fed feels?

Okay, now I can put this piece in. What do you think this timeline looks like?

Are we expected to improve overall?

So in terms of improvement on the inflation side, I think there will be, um, some countervailing forces emerging later this year.

On the one hand, the labor market is returning to balance.

On the other hand, we know that year-over-year comparisons become more difficult as we enter the second half of the year.

Normal.

So we, we’ve had this kind of decline in inflation and now we’re starting to understand that these comparisons are much more difficult.

Another wild card is the start of election season.

How does the market read the inflation reaction of the two candidates’ policies?

Normal.

So if you start looking at these policies, you might see quite a large reaction on the inflation side.

If they’re not careful, let’s look not just at Friday but at the rest of the year leading up to the election, said Adam Fsp Schroeder’s head of America’s multi-tasking team.

Thank you very much.

Thank you.