Even though the pace of US growth picked up, the latest figures represented a moderation from last year. That bodes well for the Fed, which is trying to tame inflation without breaking the economy. The report suggested officials will be able to slash rates in September, bolstering the outlook for Corporate America. Many traders said the report was also a “sigh of relief” because it did not signal the Fed would rush to cut — as that could indicate concern about about a recession.
“Goldilocks is getting stronger and the risk of stagflation is fading,” said David Russell at TradeStation. “There’s not much ‘stag; and not much ‘flation’. This kind of GDP report is a potential tailwind for corporate earnings that keeps us on pace for lower rates going forward.”
The S&P 500 rose to around 5,450. The Russell 2000 of small companies climbed 2%, while a gauge of the “Magnificent Seven” megacaps added only 0.2%. The yield on 10-year Treasuries declined six basis points to 4.23%
To Chris Larkin at E*Trade from Morgan Stanley, without any signs of an imminent recession from, the odds of a “July surprise” from the Fed next week didn’t get any better.
Even though the pace of growth picked up from the first quarter, the figures still represent a moderation from last year. Consumer spending and broader economic activity have cooled under the weight of high interest rates, which is simultaneously helping to tame inflation gradually.
“The US economy is much stronger than people realize and to the extent that markets were worried about a growth slowdown, they should breathe a sigh of relief,” said Chris Zaccarelli at Independent Advisor Alliance. “The recent pullback in stocks will likely prove to be a buying opportunity.”
While more volatility is to be expected – especially as we get closer to the election – and as long as the economy avoids a recession, the bull market will continue through 2024 and well into 2025, he says.
Wall Street’s Reaction to GDP:
GDP came in significantly stronger than anticipated, with most of the surprise coming from building inventories and a pickup in personal consumption. While this number can be subject to revisions, it does lend support to the soft-landing narrative which is our base case. Today’s report should provide some relief to stressed markets by showing that the second quarter was generally solid. However, we note that the economy does seem to be downshifting and that may cause continued volatility in the coming months.
The US economy was flying in the second quarter, and GDP growth has blown estimates away. Even though inflation has eased a bit, it is still higher than many had hoped, and this cocktail will give the Fed a headache in advance of its meeting next week. It is likely we will see rate cut expectations wane and the volatility we are currently seeing in markets is unlikely to subside as a result of this strong data.
The stronger than expected data on GDP and inflation suggest the Fed must be wary, but is unlikely to alter market expectations for a September rate cut.
Weak orders provide the Fed with further justification for a cut, and the S&P 500 may find some near-term support at current levels around the 50-day moving average.
Yet today’s data should remind investors that while one or two cuts in coming months is warranted, an aggressive easing cycle next year is unlikely.
It was a reassuring sigh of relief to see a better-than-expected result and perhaps increases the odds that the Fed can achieve a soft landing after all.
Personal consumption led the charge, which is critical in an economy where more than two-thirds of GDP is driven by the consumer. While there’s no question that the labor market has softened a bit over the last few months, the economy continues to hum along. As long as the labor market doesn’t experience too much stress, the US economy can continue to defy its critics and chug higher.
Investors must remember that markets are forward looking — and there are several positives on the horizon. Earnings growth forecasts call for continued acceleration and the Fed is on the verge of its first rate cut of this cycle.
Growth rebounded from the weak numbers in Q1 but today’s release does not change expectations that the Fed will cut rates at least two times this year as inflation decelerates.
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Wall Street’s Great Rotation Resurfaces After GDP: Markets Wrap
Wall Street traders betting the Federal Reserve will be able to engineer a soft landing spurred a rally in riskier corners of the market, with stocks rebounding after a selloff that jolted markets around the globe.
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