After having gone up in nearly a straight line since October of 2023 through the end of March, U.S. stocks took a needed break in April, unwinding about half of the nice gains they had made in the first quarter. In May, however, benign inflation data coupled with robust corporate earnings results unleashed all major stock averages to vault back into record territory. Stock investors are enjoying today’s “Goldilocks” economy, where things are not too hot, not too cold . . . but just about right.
Economy Still Strong, But Consumers Spending Less
While the economy remains in good shape, there are clear signs that consumers, whose spending accounts for two-thirds of our gross domestic product (GDP), are starting to feel the pinch of still-high prices for goods and services, higher interest rates, and a drawdown of their cash accumulated during the pandemic lockdowns. Blue chip companies such as Home Depot and Starbucks reported weakness in their sales, while travel and leisure companies have also reported a more cautious consumer. In the end, these are the results the Fed is seeking. Moderate diminution of aggregate demand from consumers should keep prices from moving higher at a faster rate than they are today.
Investors Liked April Inflation Data
This past Wednesday, April’s Consumer Price Index (CPI) data came in slightly lower than expected, giving stocks a boost. In response, the Dow Jones Industrial Average hit 40,000 for the first time ever and the S&P 500 and the NASDAQ notched new records. After a few months in which progress on inflation appeared to have stalled, the April Core CPI read of 3.6% indicates that inflation is increasing at the lowest rate in three years. While the April CPI data were constructive, we still feel that the Fed is in no rush to cut rates. However, with this lower inflation print and clear signs of consumers slowing, the Fed has probably inched up a bit on its seat and the time until its first cut may have been pulled just a bit closer. Investor sentiment indicates a slight increase in expectations for a July rate cut, but there will be two more months of data before the Fed’s July meeting.
First Quarter Earnings Were Strong
In aggregate, U.S. companies posted strong revenue and earnings growth for the first quarter of 2024. Earnings per share are up over 5% from last year, the best quarterly growth rate in two years. Revenues were up over 4%. Also, after steadily dropping for the last two years, analysts’ 2024 full-year earnings estimates for the S&P 500 companies appear to have bottomed in January and have turned upward. Analysts are now expecting S&P earnings to grow around 11% this year and up to 14% in 2025. The “soft landing” scenario, where economic growth stays solid while inflation recedes, is clearly baked into these estimates, in our view. If these estimates are in the ballpark, the S&P 500 is currently trading at a price-to-earnings multiple of nearly 22 times this year’s estimates versus the 10-year average of around 18 times. Thus, stocks are trading at optimistic prices, by this metric at least.
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