Stocks took a breather last week as the S&P 500 decreased by 0.5%, bringing it to 0.8% off the all-time high. The Magnificent 7, comprised of Microsoft, Meta Platforms, Amazon.com, Apple, NVIDIA, Alphabet, and Tesla, underperformed last week but remain 24.9% higher year-to-date. In comparison, the S&P 500 has risen by 11.3%. Recent U.S. economic data has softened slightly, leading to a 2.7% estimate for second-quarter GDP growth. The first quarter GDP was revised lower to 1.3%, but details showed some improvement. Signs of price fatigue for the U.S. consumer have also emerged, with a lower-income consumer being squeezed by essential costs while higher-income individuals have become more price-conscious, impacting consumer discretionary stocks.
Despite the softening economic conditions, earnings estimates for the S&P 500 for 2024 and 2025 continue to trend upward, showing no signs of an impending recession. U.S. Treasury yields have eased below their late April highs, following softer economic data and more favorable inflation readings. The performance of economically sensitive cyclical stocks compared to less economically tied defensives does not suggest a sharp decline in economic activity. Bank stocks would likely suffer if the markets anticipated significant economic weakness in the short term. Cash levels in April show no signs of stress yet, indicating that while lower-income households may be feeling pressure, the overall economy remains stable.
Markets have priced in a 60% chance of a Federal Reserve easing in September, up from 50% previously, with expectations for one-and-a-half cuts of 25 basis points in 2024. Initial jobless claims have seen an upward trend this year, reflecting a softening labor market. However, the absolute levels of jobless claims remain low historically. This week’s jobs report will provide further insights into job demand and wage pressures. While recent data has raised concerns about the U.S. consumer’s well-being, other indicators suggest a post-COVID trend normalization with some softening in the labor market. The lack of rush to defensive sectors like consumer staples and healthcare indicates that the economic slowdown doesn’t significantly increase the risk of recession in the short term.
This easing in economic growth and labor market conditions could provide the Federal Reserve room to start cutting short-term interest rates, increasing the likelihood of a soft landing. Overall, while there are some concerns about the U.S. consumer and economic growth softening, the data suggests a more normalized post-pandemic trend rather than an imminent collapse. The markets will continue to monitor economic indicators and the Fed’s actions to gauge the trajectory of the economy and potential future moves.
