Can the Economic Data Keep Up? The Market’s Tightrope Walk Between Growth and Inflation

The stock market is hitting record highs on a regular basis, buoyed by a robust economy and future optimism.  Economists are divided, with some forecasting a gentle easing and others cautioning against a looming recession.  However, most were wrong last year.  The market’s keen focus remains on inflation, economic expansion, the Federal Reserve’s policies, and global events. Interest rate decisions and market trends are increasingly data-driven, according to the Fed and Wall Street, with current indicators suggesting a thriving economy and an expanding stock market. Despite concerns over an impending slowdown due to increased rates, economic and earnings data continue to show strength. Corporate profits are solid, with most companies surpassing forecasts, although by narrower margins than previously. The economy, while moderating, continues to exhibit significant growth.

Investors today pore over more quarterly reports. Uber’s (UBER) stock is dipping despite surpassing expectations, while Yum Brands (YUM) saw a 2.5% decline after underwhelming results. Snap’s (SNAP) shares are taking a steep dive, dropping over 30% following a disappointing earnings report and outlook. Conversely, Ford’s (F) stock is on the rise after it outperformed fourth-quarter predictions and provided an upbeat annual forecast, alongside announcing a special dividend.

We’re now at the midpoint of the fourth-quarter earnings season. This season has been robust, fueled by hopes of a Federal Reserve rate cut in 2024, with significant contributions from the “Mag 7” (quickly becoming the Fantastic 4) and other large tech and AI-driven companies. The market continues to reward innovation, focusing on a select group of tech disruptors.   Investors continue to anticipate the broadening of the market beyond the “Mag 7” which hasn’t materialized significantly at this point. 

However, despite the economy’s tenacity, skepticism has increased, especially after Fed Chair Jerome Powell indicated that interest rate reductions would be on hold. The Federal Reserve maintains that rates will remain elevated for an extended period.

Given the strong job market and consumer confidence, there’s a looming risk of inflation’s return. Currently at 3.4%, inflation exceeds the 2% target, and bridging this gap could prove difficult if American consumers maintain their spending habits. The Fed aims to temper spending to manage inflation, suggesting that interest rates might not decline until the economy shows more significant signs of cooling.

Today, we anticipate speeches from several Federal Reserve officials, followed by earnings reports from Walt Disney (DIS), PayPal (PYPL), and Arm Holdings (ARM).

The stock market continues its ascent, often acting as a precursor to economic conditions, albeit sometimes overly optimistic. Moving forward, we’ll keep an eye on evolving data, but for now, the economy, businesses, and consumers appear resilient. Investors are prioritizing sustainable growth, and the U.S. economy’s durability emphasizes the need for careful risk management and strategic patience in investment approaches.

Key Points:

• The stock market is hitting record highs seemingly weekly, fueled by optimism but with divided future expectations.
• Inflation, earnings growth, Fed policy and global events are key data factors in the outlook. 
• Earnings are exceeding expectations, but the surprises are below average. 
• Tech layoffs are becoming in the headlines lately. Will the trend continue?
• “Mag 7” tech companies are still driving the market and the market participation remains narrow.
• Inflation at 3.4%, above target, which will slow the expected rate cuts in early 2024.

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