Inflation and geopolitics and earnings. Oh, my!

It was a rough week for stock markets. "The S&P 500 closed 1.5% lower on Friday, while the Nasdaq Composite dipped 1.6%. Every S&P 500 sector closed lower—and just about 40 stocks in the index finished the day with gains," reported Connor Smith of Barron's.

A trio of issues caused investors to reassess their expectations for the year. Here's what many were thinking about:

Prices rising at home. Early last week, the Consumer Price Index showed prices had moved higher in March. Headline inflation was 3.5 percent year-over-year, up from 3.2 percent in February. Higher prices for gasoline and shelter were the primary drivers of the increase. Inflation, in tandem with strong economic data, dashed investors' hopes that the Federal Reserve will lower rates soon, reported Augusta Saraiva and Matthew Boesler of Bloomberg.

Tensions rising overseas. One of the drivers behind rising prices is geopolitics, reported Rita Nazareth of Bloomberg. Oil markets have been responding to the possibility of escalating tensions in the Middle East, as well as the damage done by drone strikes on Russian oil infrastructure. Equities moved lower and gold moved higher as investors sought so-called safe-haven investments, last week.

Corporate earnings growth. Last week, banks began reporting on their performance during the first quarter of 2024. Some banks reported net interest income (the profit earned from lending money) that was lower than analysts anticipated. The gap in expectations was due, in part, to the fact that bank accountholders were seeking higher returns on their savings, reported Sridhar Natarajan of Bloomberg. Despite disappointment over bank's interest income, earnings grew by 3.2% for the handful of S&P 500 companies that have already reported, according to John Butters at FactSet.

By the end of the week, major U.S. stock indices were lower. U.S. Treasury yields moved higher over the week.

Financial markets are likely to be volatile as investors adjust to U.S. economic strength and changing expectations for Fed rate cuts and geopolitical events. While market turbulence can be unsettling, price swings can create opportunities to invest in quality assets at attractive levels.

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Greg Womack

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