Stocks Rise 10% in April on Spectacular Earnings

Commentary

The opening wave of robust earnings reports helped the S&P 500 surge over 10% in April. The market is being overpowered by positive earnings, with much more to come. As it turns out, five of the Magnificent Seven stocks reported last week, and their earnings announcements and guidance, thrilled Wall Street. Amazon and Google each rose on the theory that they could challenge Nvidia’s leadership, causing Nvidia to get hit with some profit-taking. I find this narrative truly ridiculous, since Amazon and Google do not make GPUs. There is no doubt Amazon and Google can team up with AMD, or some other company, to make AI devices, like a “Super Alexa,” but they are not creating regenerative AI, where computers make their own decisions, so I stand by my core evaluation of Nvidia as an effective monopoly, with no real competition in GPUs.

The big story in the data center companies is “order backlogs,” as they can’t yet fulfill rising demand. Although there is pushback against data centers, most of our 50 states support data center construction. These data centers tend to go where there is fast internet, relatively easy electricity, and cold climates to vent their heat at night. With so many states welcoming data centers, I do not expect this boom to slow.

For example, Seagate Technology (STX) announced quarterly revenues up 44% to $3.11 billion, while operating earnings rose 115.8% to $4.10 per share. The analyst community was expecting revenues of $2.93 billion and operating earnings of $3.50 per share, so Seagate posted a 6% revenue surprise and a 17% earnings surprise. The company also raised its quarterly guidance above consensus estimates, which got investors even more excited. Also, Bloom Energy (BE), nVent Electric (NVT), and Qanta Services (PWR) beat estimates, gapping higher, as data center-related stocks continue to lead the market.

Here are the most important developments recently and what they mean:

– The Middle East supplies about 20% of the aluminum consumed in the U.S., so the blockage of the Strait of Hormuz is now hindering the auto industry and other aluminum-intensive industries. Prices for aluminum from U.S. smelters have risen nearly 90% in the past year. Canada remains a major supplier of aluminum due to its cheap hydroelectric plants, which give it a competitive advantage, despite tariffs. In the meantime, the inventory of Ford’s F-150 trucks is now only 42 days, down from a normal supply of 60 days.

– The Wall Street Journal reported that Iran is struggling to store unsold crude oil and is now putting it in its old tanks. If Iran has to cap its crude oil wells, it will curtail production for months, since restarting oil wells takes a lot of engineering. So, it will be interesting if the infighting within Iran will eventually result in economic sanity. The goal of the Naval blockade remains to cut off funds to the Iranian Republican Guard Corps (IRGC).

– When German Chancellor Merz recently said America has been “humiliated” by Iran, it irked President Trump, who announced that the U.S. would be withdrawing 5,000 troops from Germany. Furthermore, President Trump has threatened 25% auto tariffs on the European Union (EU) because he says that the EU has failed to comply with the existing trade agreement, which has a 15% auto tariff. The truth of the matter is, the Trump Administration has been conducting a full-court press to get the German auto industry to pick up and move more of its production to America, since they already have huge plants in Alabama, South Carolina, and Tennessee. Even Porsche may have to sub-assemble some of its premium vehicles at VW’s new Scout Motors plant in South Carolina by shipping engines and transmissions from Germany to circumvent tariffs. Since electricity in the south is only about 25% of what green energy costs in Germany, there are other economic incentives to move more production to America.

– It will be interesting just how much all the onshoring to America will boost GDP growth. The Atlanta Fed is now estimating 3.5% annual GDP growth in the second quarter, but I expect that will be revised higher and may actually hit a 5% annual pace from all the onshoring, increasing energy exports, AI-fueled productivity gains, and improving consumer spending. In fact, I expect 5% annual GDP growth to occur no later than the third quarter this year.

– New incoming Fed Chairman Kevin Warsh’s first objective is to try to get a consensus on the FOMC before there are more key interest rate cuts, so a cut is not guaranteed at the May FOMC meeting. However, America’s dominance is strengthening the U.S. dollar and causing the prices of many commodities and imports to soften, which is, in turn, deflationary. AI productivity gains are also deflationary. Since the Fed cannot control energy prices, I expect that Warsh will strive to convince the FOMC that more key interest rate cuts are necessary.

– Treasury Secretary Scott Bessent and incoming Fed Chairman Kevin Warsh certainly have their hands full now that the federal government’s cumulative debt exceeds 100% of GDP. There has been talk that Bessent and Warsh may explore coordinated action to push Treasury yields lower. This is just Wall Street gossip, since Warsh must first get more members on the FOMC to agree with him. However, as more central banks conduct quantitative easing (i.e., money printing) due to shrinking demographics in Asia and Europe make balancing bloated government budgets harder, the U.S. will have some flexibility. Whatever Bessent and Warsh do, they do not want to weaken the U.S. dollar, since a strong dollar is naturally deflationary, because it lowers the price of commodities (priced in U.S. dollars) and imported goods.

Overall, investors are increasingly confident that the U.S. is the safest place in the world to invest. Foreigners now hold a record $9.5 trillion in U.S. Treasuries and are also expected to benefit from an appreciating U.S. dollar due to stronger economic growth as well as higher interest rates than available in China, Japan, and the EU. Finally, the U.S. has better demographics than most countries, so its potential for future economic growth is simply unmatched.