Investors will be closely watching inflation numbers and next week’s Federal Reserve meeting to see if hopes of a soft landing that have pushed stocks to record highs are still justified.
This year’s rally has the S&P 500 up more than 12% year to date, thanks to the Fed’s hopes of curbing inflation without hurting growth. Yet recent economic data sends mixed signals: U.S. employment figures released Friday were much higher than expected, amid earlier reports of a slowdown in manufacturing and a revision to the decline in the growth rate of the first quarter.
Inflation data for the month of May, expected next Wednesday, must be very cautious in order to meet the expectations of a “Goldilocks” economy: satisfactory growth and controlled prices. Later today, investors will look to the Fed for signals on the central bank’s interest rate cut plans.
The market would like some clarity and not see the Fed wait until December or January to start cutting rates, said Paul Christopher, head of global markets strategy at the Wells Fargo Investment Institute, adding that a long period of cost High borrowing could harm the economy.
The Employment Department’s Bureau of Labor Statistics reported Friday that nonfarm payrolls rose by 272,000 last month, surpassing the 185,000 jobs forecast by economists polled by Reuters. After the data was released, futures markets showed investors lowering their rate cut expectations, with the odds of a September cut falling to around 55%, down from around 70% before the report was released.
The strong jobs data offset previous reports suggesting the economy was slowing, including a June 3 release showing U.S. manufacturing activity in May slowed for a second straight month.
Despite the S&P 500’s march to new record highs, some investors worry that gains have been concentrated in a few big tech and growth names, such as Nvidia, with the rest of the market much more tepid.
U.S. stock valuations remain well above historical norms, noted Ed Clissold, chief U.S. strategist at Ned Davis Research. The S&P 500’s median price-to-earnings ratio would have to fall 31% to its long-term median, and 19% to its 20-year norm, he said.
“People are worried about how big and high this market is going up and how narrow it is,” said Raul Diaz, chief investment officer at Northern Trust Wealth Management.
Many investors believe that strong corporate results and a relatively favorable macroeconomic environment can continue to support stocks. First-quarter profits beat analysts’ expectations by about 8.1%, according to LSEG data.
We believe US stocks should remain supported by favorable macroeconomic conditions, healthy earnings growth, AI headwinds and the possibility of a Fed turnaround before the end of the year, Solita wrote Marcelli, chief investment officer Americas at UBS Global Wealth Management, in a note published this week.
The bank recently raised its year-end target for the S&P 500 to 5,500, a 3% increase from the index’s current level.
Others believe it is political uncertainty, not economic data, that will cause turbulence later in the year. The first debate between Democratic President Joe Biden and Republican opponent and former President Donald Trump will take place on June 27, almost three months earlier than the September 16 date suggested by the nonpartisan Commission on Presidential Debates. which has managed these debates since 1988.
Grace Lee, senior portfolio manager at Columbia Threadneedle Investments, said this could focus markets’ attention on the 2024 presidential election earlier in the year than usual.
“On the surface, the market still seems to be doing well, but I think there is some nervousness that may not even be related to the economic data,” Ms. Lee said. “People want to stick with what has worked and not venture too far into other areas that might have political ramifications, whether it’s health care and drug prices or clean energy (Reporting by David Randall; Writing by Ira Iosebashvili and David Gregorio)
