Goldilocks Data

Over the past two weeks, markets have roared back to life. After a brief pullback, softer economic data has pushed back against concerns about an inflation resurgence. Although inflation remains a worry in some areas, overall economic growth has cooled, and there’s been a better balance in the labor market, which has helped alleviate concerns. As a result, Federal Reserve cuts are back on the table for 2024. More importantly for stocks, earnings continue to impress, and companies are on track to post strong growth numbers this year.  

Inflation remains a top concern for market participants. Any data suggesting the possibility of a second wave has been problematic for markets. The recent softer economic and jobs data has been a welcome reprieve from that narrative. Both GDP and jobs reports fell short of expectations. First quarter GDP growth was 1.6% vs. expectations for 2.4%. April jobs numbers came in at 175K, below the anticipated 240K. The unemployment rate also ticked higher to 3.9%. While the economy is not running red hot, it’s also not falling off a cliff.  

Data has softened just enough to bring rate cuts back into the discussion. Just a few weeks ago, participants were concerned about the possibility of another rate hike. However, today, markets are again anticipating between 1 and 2 quarter-point cuts by year-end. Interest rates have declined across many short-term to long-term U.S. government bonds. This shift has been enough to rejuvenate stocks out of their brief downturn.
 
Earnings have also played a significant role. Most companies have completed their Q1 reports, revealing sales and earnings surpassed expectations. Sales exceeded forecasts by roughly 1%, while earnings by approximately 8%. Remarkably, 54% of S&P 500 companies outperformed sales projections, and 79% exceeded earnings estimates. With this strong performance, companies are on track to meet lofty year-end growth targets. Overall, earnings are projected to grow by over 12% this year. 

With these targets in sight, stocks have generally regained momentum. Strong reports from the technology and communications sectors have positioned them to reclaim their leadership roles. Simultaneously, we continue to see robust performance from energy, financials, and select areas of industrials and utilities. Overall, market breadth appears healthy.  

However, it’s important to pay attention to the consumer discretionary sector, which includes companies selling entertainment, apparel, and luxury items. Stocks tied to non-essential purchases face challenges, aligning with an economic slowdown. Individuals affected the most by increased interest rates and prices are cutting back on discretionary spending. Therefore, we emphasize investing in companies that provide essential goods and services. 
 

Thanks,
Preston May, CBE®
Research Analyst