Stocks took another breather last week, while bonds changed little. The 0.5% decrease in the S&P 500 took the index to 0.8% off the all-time high. The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), underperformed last week but is 24.9% higher year-to-date. In comparison, the S&P 500 has risen by 11.3%.
Recent U.S. economic data has softened on the edges, causing the Atlanta Fed’s estimate of second-quarter GDP to ease to 2.7%. This softness comes on the heels of the first quarter GDP being revised lower to 1.3%, but the details were better than the headline reading. Additionally, there have been signs of price fatigue for the all-important U.S. consumer. Recent trends and retailer earnings point to a lower-income consumer being squeezed by the cost of essentials while the higher-income consumer has become more price-conscious. This squeeze on the consumer has been echoed by the underperformance of consumer discretionary stocks relative to the S&P 500 since late April, even though they got a slight respite last week.
The softening in economic conditions has not crept into earnings estimates yet. Consensus 2024 and 2025 earnings estimates for the S&P 500 have retained their upward trend, showing no signs of an impending recession.
The 10-year and 2-year U.S. Treasury yields are well above their year-to-date lows but have eased below the highs from late April as the economic data softened on the margin and friendlier inflation readings emerged.
Looking at the more economically sensitive cyclical stocks versus the performance of the less economically tied defensives gives no signal of an impending sharp decline in economic activity. In fact, despite the poor relative performance of the consumer discretionary stocks mentioned earlier, consumer staples or healthcare companies have not seen any persistent outperformance either. Further, bank stocks would likely perform poorly if the markets had sniffed out the likelihood of significant economic weakness in the short term.
April’s reading for cash levels in the economy shows no signs of stress yet. This statistic doesn’t illustrate the stress on lower-income households but shows that cash levels remain ample and above pre-COVID. Evidence would point to the consumer normalizing toward pre-COVID spending and credit levels rather than heading for an imminent collapse.
In reaction to the friendlier inflation data and some softer economic growth expectations, markets have now priced in a 60% chance of a Federal Reserve (Fed) easing in September, up from 50% just a few days ago. Fed Fund futures are looking for one-and-a-half cuts of 25 basis points (0.25%) in 2024.
Initial filings for unemployment benefits have seen an upward trend year-to-date, reflecting a softening labor market. Even this increase in initial jobless claims should be put in context because the absolute level remains at the low end of the historical range. This week’s monthly jobs report on Friday will be closely watched for further evidence of easing job demand and wage pressures.
While recent data has fed concerns that the U.S. consumer, vital to economic growth, might be in trouble, other indicators don’t confirm the fear of imminent danger. It looks more like the continuation of a post-COVID normalizing trend combined with some softening in the labor market. The lack of a rush to the defensive sectors like consumer staples and healthcare shows that this economic slowing doesn’t radically increase the risk of recession in the short term. This easing in economic growth and the labor market might give the Federal Reserve room to begin cutting short-term interest rates, thereby increasing the odds of a soft landing.
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