Weekly Market Update: August 5, 2024
Inflation is cooling. The Personal Consumption Expenditures (PCE) Price Index, the gauge of inflation most closely tracked by the Federal Reserve, rose just 0.1% in June. The core PCE Price Index, which excludes the food and energy components, increased 0.2%, in line with the consensus forecast. On a 12-month basis, the PCE and the core PCE rose 2.5% and 2.6%, respectively, with the headline figure down from the prior month and inching closer to the Fed’s target rate of 2%.
The Federal Reserve’s attempt to produce a “soft landing” for the U.S. economy remains plausible. On point, the nation’s gross domestic product (GDP) expanded at an estimated annualized rate of 2.8% in the second quarter, surpassing the consensus forecast of 2.1% and double the 1.4% gain recorded in the first period. Of note, the advance was powered by a still-resilient consumer sector, with growth in personal consumption accelerating to an annualized rate of 2.3%, up sharply from the 1.5% increase recorded in the initial quarter of this year. More importantly, this gain was achieved without a rise in the pace of price growth, which had to please the central bank.
Meanwhile, second-quarter earnings season has thus far been constructive for Corporate America. At the halfway point, more than 75% of the S&P 500 companies reporting had surpassed Wall Street’s prognostications, with the consensus estimate now looking for profit growth in the vicinity of 10%. It would mark the fourth-straight quarter of earnings growth and this may be needed to justify the Index’s elevated price-to-earnings valuation. That said, it should be noted that those companies that have failed to meet their forecasts or lowered their near-term expectations (e.g. Alphabet and Tesla) have felt the wrath of investors.
Conclusion: Volatility in the U.S. equity market picked up at the end of July, a month that has typically been good for stocks. Much of this was driven by profit-taking in an equity market that began second-quarter reporting season at a record high, while dealing with the uncertainty about if and when the Federal Reserve may begin to loosen the monetary policy reins. In this environment, we continue to recommend a diversified portfolio led by stocks of high-quality companies.
Source: ValueLine.com
