Big Tech Roars, Offsetting Inflation and Growth Concerns

April 26, 2024

Here are the economic and market highlights for the week: 

  • Q1 2024 GDP decelerated to an annualized, real growth rate of 1.60%, well below forecasts of 2.40%. Consumer spending was positive at a 2.50% annualized rate, but it too showed a sharp decline from the 3.30% posted in Q4 2023. Consumer spending, fixed investment, and government spending managed to keep the economy expanding, while a decline in private inventories and net exports combined to drag on growth.
  • The PCE Index, excluding food and energy, increased 2.80% from a year ago in March, above the Fed’s target of 2.00%. Month-to-month, core prices were higher by 0.30% which followed a similar rise in February. Annualizing the rates seen thus far this year and core inflation appears to be trending at a worrisome 4%+ rate. Inflation was most pronounced in the service sector and in food. Consumer spending drove the price increases, up 0.80% in March. This matched February’s rise. Spending was enabled by a 0.50% in personal income along with a decline in the savings rate to 3.2% (from 3.6% in February).
  • Consumer Sentiment slipped to 77.2 in April from 79.4 in March. The drop was driven by an increase in inflation expectations to 3.20%, up from 2.90% the month before. Five-year inflation expectations also moved higher to 3% from 2.80% in March.


Big Tech Roars, Offsetting Inflation and Growth Concerns

It was a volatile week on Wall Street. Better-than-expected Q1 earnings helped the S&P 500 snap a 3-week losing streak and offset concerns sparked by Thursday’s weaker than expected Q1 2024 GDP report. The GDP report rattled investors by showing a sharp decline in growth from the previous quarter, while at the same time inflation accelerated at its fastest pace in over a year. It is important to note that Thursday’s release is an “advanced” reading, and subject to revision, but the report is likely to push the prospects of a rate cut into late 2024. The report also fanned concerns that the Fed may not be entirely done with rate hikes for this cycle, which is something some Fed members have hinted at in recent weeks. Bond yields were particularly susceptible to the inflation reading and the benchmark 10-year Treasury yield spiked to 4.70% – its highest level in more than five months.

The prospect of slow growth and higher inflation is an investor’s worst nightmare. While elements of both were present in Q1’s estimate, it should be noted that the foundation of the economy -the consumer – is still in very good shape (strong income growth, solid job market), and we suspect the market’s reaction to the growth figure was overdone. That said, what is good for the consumer these days is bad for inflation, and Thursday’s selloff is probably more appropriately assigned to a recalibration of investors’ expectations for rates, with the expectation now being that we will see just one rate cut in 2024. Evidence for that conclusion has been mounting for months now, but Q1’s GDP report simply placed emphasis on it.  Fortunately, investors were treated to a robust set of earnings announcements this week, led by Big Tech. Microsoft and Google-parent Alphabet scored big earnings beats and lifted optimism for all things AI. Of the 229 companies in the S&P 500 that have reported earnings to date, 77.7% have reported above analyst expectations and aggregate earnings growth for the quarter are on track to increase 8.70%.  Positive earnings news fueled bullishness on Friday, helping the major indices post healthy gains for the week


The Week Ahead

Next week, we will take a look at the following data: 

  • FOMC Meeting
  • Nonfarm Payrolls
  • ISM Manufacturing


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