First-quarter earnings season ended with all S&P 500 sectors beating expectations. Eight of the 11 sectors delivered double-digit EPS growth, contributing to overall earnings growth of 28% year-over-year, well above analyst forecasts. Revenue and earnings exceeded consensus estimates 80% of the time. Strong earnings helped markets look past concerns surrounding the Middle East, global trade negotiations, Federal Reserve leadership changes, and the upcoming U.S. midterm elections. Equity markets posted double-digit gains for the quarter, while bonds also delivered positive returns despite changing interest-rate expectations, resulting in strong overall market performance. Overall, resilient earnings and positive market performance reinforced investor confidence and supported strong returns across nearly all asset classes.
Cash & Fixed Income: Tax-free municipal bonds led for the quarter and 1-year, while high-yield corporate bonds led for all other periods. Aggregate bonds were the laggards in the quarter, 1-, 5-, and 10-year periods. Tax-free bonds still lagged over 3 years, while cash was the worst performer over 15 years.
In May, we rebalanced portfolios by adding to bond and alternative allocations, which were underweight due to the strong equity surge. While these assets also appreciated, they continue to provide ballast in the portfolio, which has worked quite well this year, especially during the equity selloff in March.
Equities: While small-cap stocks led during the quarter and 1-year period, they still lagged over 5 years. Large-cap stocks led in all other periods. Foreign stocks lagged in the quarter, 1-, 3-, 10-, and 15-year periods, and small-cap stocks were the worst-performing stock category over the past 5 years.
In April, we swapped our three mid-cap funds for a mid-cap ETF with a lower expense ratio and better performance. In May, as part of the quarterly rebalance, we took profits in large-cap, small-cap, and foreign equity and redistributed the proceeds to ensure portfolios were in line with their long-term strategic target allocations.
Continued economic strength is expected to drive robust second-quarter earnings growth of more than 20% year over year. Strong consumer demand, healthy business activity, and favorable economic conditions remain key drivers of growth. While market volatility may persist, especially with a new Federal Reserve Chairman and the midterm elections, the earnings backdrop remains supportive, and we remain constructive. Any weakness could present attractive rebalancing opportunities at lower prices.
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