Growth
The U.S. economy grew 1.6% q/q saar in 1Q24, falling short of expectations for 2.5% growth. That said, weakness at the headline level masked some of the underlying strength in the report. Consumer spending rose 2.5% as spending on services more than offset a decline in goods spending, while the more volatile trade and inventories components detracted from growth. However, real final sales to private domestic purchasers, which exclude these volatile segments, rose by a solid 3.1%. Overall, economic growth should continue to moderate during the balance of this year, although this report likely masks recent economic momentum.
Jobs
The April Jobs report was softer than expected and provided a welcome reassurance that the labor market is not adding to inflationary pressures. Nonfarm payrolls rose by 175K, below expectations of 220K, with a net downward revision of 22K applied to February and March. The economy added jobs to where it needed them the most, such as health care and social assistance while government hiring, which had been a strong source of hiring in the past year, slowed. In the household survey, the labor force was mostly unchanged, and the unemployment rate moved up slightly to 3.9%. Elsewhere, wage growth rose to 0.2% m/m and moderated to 3.9% y/y. This marks the softest y/y increase in wages since June 2021. Overall, the labor market continues to show healthy job growth without renewing concerns about inflation.
Profits
The 1Q24 earnings season is winding down. With 82% of market cap having reported, our current estimate for S&P 500 operating earnings per share (EPS) is $54.78. If realized, this would represent growth of 4.3% y/y and 1.6% q/q. Across sectors, information technology and communication services are expected to have another strong quarter, while resilient consumer demand should support the consumer discretionary sector. Elsewhere, energy, materials and health care are expected to see earnings fall. Revenues, supported by resilient economic activity and solid inflation, are expected to be the largest contributor to operating earnings growth, although margins will play an increasingly important role as momentum slows.
Inflation
The March CPI report came in stronger than expected, with many of the usual suspects driving the bulk of this strength. Headline CPI rose 0.4% m/m and 3.5% y/y, its fastest annual increase since September, while core CPI rose 0.4% m/m and 3.8% y/y. Energy prices rose for a second consecutive month while shelter and auto insurance were up 0.4% m/m and 2.6% m/m, respectively. Similarly, headline and core PCE rose by a hotter than expected 2.7% and 2.8% y/y, respectively. Overall, stalling progress on disinflation limits the likelihood of a Fed rate cut in June, although underlying disinflationary trends should allow inflation to march lower over the course of this year.
Rates
At its May meeting, the FOMC voted to hold rates steady at 5.25%-5.50% for a sixth consecutive meeting and announced a slower pace of quantitative tightening beginning in June. It cut the monthly cap on Treasuries from $60 billion to $25 billion and left the $35 billion cap on agency mortgage-backed securities unchanged. During the press conference, Chairman Powell noted the recent stalling on disinflation progress but maintained his bias toward cutting. The timing of rate cuts will likely depend on the inflation and growth data between now and the June and September meetings.
Risks
- Stalling progress on disinflation could delay rate cuts, presenting challenges to both stocks and bonds.
- A slow-moving economy is more vulnerable to any kind of shock.
- Elevated valuations in some parts of the market may lead to volatility and market corrections.
Investment Themes
- Fixed income offers attractive levels of income and protection against an economic downturn.
- Broadening profit leadership and reasonable valuations should present opportunities outside of the Magnificent 7.
- Long-term growth prospects and improving fundamentals should support international equities.
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Originally Posted May 6, 2024 – Economic Update
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