{"id":9779,"date":"2024-05-28T14:21:36","date_gmt":"2024-05-28T14:21:36","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9779"},"modified":"2024-05-28T14:21:36","modified_gmt":"2024-05-28T14:21:36","slug":"does-the-whipsaw-stock-market-signal-bad-newsor-good-news","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/does-the-whipsaw-stock-market-signal-bad-newsor-good-news\/","title":{"rendered":"Does The Whipsaw Stock Market Signal Bad News\u2026Or Good News?"},"content":{"rendered":"\n

Is \u201cBad News Good News\u201d for the U.S. Economy?<\/strong><\/p>\n\n\n\n

U.S. stocks have been on a volatile ride over the past six weeks or so. In April, the S&P 500 sold off sharply, posting a 4.2% decline. But equity prices have moved the other way this month, with a \u201cv-shaped bounce\u201d pushing the S&P 500 to new all-time highs. So much for \u201csell in May and go away.\u201d1<\/sup><\/p>\n\n\n\n

The financial media has a tidy explanation for the market whipsaw. April\u2019s selling pressure was due to higher-than-expected inflation in Q1, which lowered the likelihood of rate cuts this year. But fortunes reversed in May when April CPI did not show a reacceleration, and slightly weaker U.S. economic data\u2014specifically in the jobs market and with April\u2019s Services PMI\u2014put rate cuts back on the table.<\/p>\n\n\n\n

The takeaway for many is that \u201cbad news is good news\u201d again for the stock market since relatively weak economic data opens the door for the Fed to lower interest rates. In other words, weaker-than-expected jobs data was a major positive for stocks, which only seem to care about the prospect of looser monetary policy.<\/p>\n\n\n\n

I don\u2019t buy it.<\/p>\n\n\n\n

For one, it is a bit premature to say the U.S. economy is in a weakening pattern, in my view. The April jobs report showed that employers added 175,000 new jobs for the month, which was below expectations for 240,000 jobs but still showed solid growth. A slight deceleration does not raise any alarm bells, and one month\u2019s worth of data doesn\u2019t tell us much about trends in the labor market. Overall, there are still about 2 million more open jobs than there are unemployed persons in the U.S., which I think signals the labor market remains tight.<\/p>\n\n\n\n

Job Openings Still Outnumber Unemployed Persons by a Healthy Margin<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

U.S. consumers have also not shown meaningful signs of pulling back on spending, and the May 16th estimate from the Atlanta Fed\u2019s GDPNow forecasting tool projects 3.6% GDP growth in the current quarter. If there\u2019s bad news about U.S. economic activity that\u2019s significantly raising the likelihood of rate cuts soon, I\u2019m not aware of it.<\/p>\n\n\n\n

On the contrary, I would posit that \u201cgood news has been good news\u201d for stocks in May, and it\u2019s been coming in the form of robust corporate earnings.<\/p>\n\n\n\n

Zacks is anticipating year-over-year earnings growth of roughly 5%, which marks the third consecutive quarter of growth. We\u2019ve also noted from earnings calls that CEOs are talking about inflation and recession risks far less than they were in 2022. In that year, some 90% of S&P 500 companies cited inflation in earnings calls, and up to 40% mentioned \u201ceconomic slowdown.\u201d In Q1 2024, just over half of companies mentioned inflation risks and less than 10% referenced an economic slowdown.<\/p>\n\n\n\n

Additional signs that executives are feeling more confident about the macroeconomic outlook include higher capital expenditures (CapEx) and more stock buybacks. According to Business Roundtable\u2019s CEO survey, 40% of CEOs expected to increase investments in the next six months, the highest since Q4 2022 and up 32% from Q4 2023. As seen in the chart below, business investment has been strong in recent periods.<\/p>\n\n\n\n

Business Investment, Change in Billions of Dollars<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

As for share buybacks, S&P 500 companies announced nearly $200 billion in share buybacks in Q1, a 16% increase from the same period in 2023. Some 443 companies have announced plans to buy back shares, which is up from 378 a year ago. By some estimates, S&P 500 share buybacks could reach $925 billion in 2024, an annual growth rate of 13%.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

Obsessing over monthly economic data and its potential impact on Fed policy is not an effective outlook in my view. Investors can frame April\u2019s pullback and May\u2019s recovery in terms of shifting expectations around interest rates, but doing so means ignoring stocks\u2019 main driver\u2014earnings. Since 2020, earnings have contributed almost three-quarters of the S&P 500\u2019s 70+% return.<\/p>\n\n\n\n

Looking ahead, we expect S&P 500 companies to grow earnings by 9% in 2024. If companies deliver better-than-expected results, I\u2019d expect more upside from stocks, too\u2014whether the Fed cuts rates this year or not.<\/p>\n","protected":false},"excerpt":{"rendered":"

Many pundits say the steep drop and equally dramatic rise in stocks is due to weakness in the economy. Mitch offers a dissenting opinion. <\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9779","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9779"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9779\/revisions"}],"predecessor-version":[{"id":9783,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9779\/revisions\/9783"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}