Hot Markets, Cool Growth

With earnings season in full swing and a heap of economic data to digest, markets have become lively. The S&P 500 is currently only 3% below its all-time high, but the day-to-day fluctuations are on the rise. Concerns persist about the trajectory of inflation and economic growth, especially due to recent reports raising alarm in both areas. Nevertheless, corporate earnings have held up quite well despite these challenges. Sales and earnings have exceeded projections and are on track to meet the lofty expectations of 2024. Although there have been some shifts in market leadership, the overall trends remain intact, and weaknesses have mostly been seen as opportunities. Notably, dividend stocks have found favor in recent weeks.

Recent economic data from the first quarter has been surprising on two fronts. First, reports show that inflation is still running hotter than expected. Second, while economic growth is positive, it’s cooler than anticipated. In the first three months of 2024, the Core Personal Consumption Expenditures Price Index (PCEPI), the Federal Reserve’s preferred measure of inflation, increased 3.7%. The Fed favors the PCEPI because it reflects changes in consumer spending patterns and includes a broader range of goods and services compared to other inflation measures, providing a more comprehensive view of inflationary pressures on the economy. With the inflation rate well above the 2% target, that likely means rate cuts won’t happen any time soon. At the same time, real GDP came in at 1.6% quarter over quarter, well below economists’ estimates of 2.4%. Consumption has been the backbone of this economy but fell short of estimates by 50 basis points last quarter. While not necessarily detrimental, this raises questions about the long-term impact of tighter policy.

With almost half of the S&P 500 reporting, corporations are not showing signs of slowing down. Sales have exceeded expectations by more than 1% and earnings by over 9%. Earnings growth has only increased 3% year over year, but estimates for the full year are still on track for over 10%. Companies have done a good job protecting margins against inflation without alienating their customer bases. It’s also worth noting that companies tied to artificial intelligence (AI) continue to deliver impressive results. AI represents a long-term trend that isn’t influenced by the Fed’s short-term decisions. Fundamentally, stocks are sitting on solid ground.

Despite market turbulence in recent weeks, we’re encouraged by the subtle broadening across various sectors. While Technology has quietly retreated from its leadership position, other sectors like Energy, Financials, Communications, and Industrials have stepped up in its place. This type of breadth has not been seen in over a year and is certainly welcome. For all the concerns about inflation and growth, the market appears healthy.
 

Thanks,
Preston May, CBE®
Research Analyst