All Signs Point to a Rate Cut
Equity markets gained during the week. The S&P 500 Index rose 0.6%, while the NASDAQ Composite gained 1.9%. The Magnificent 7 outperformed the core benchmark, rising 3%. Small caps faltered, falling 1.7% for the week. Bond indices rose 0.8% during the week.
A number of economic releases relating to employment indicate this segment of the economy may be beginning to show some weakness. The employment picture in the United States, which previously had been a bright spot, has recently been showing some challenges. The latest nonfarm payrolls figures for August came in weaker than expected (142,000 versus 160,000 forecasted). The previous results for June and July were revised down as well, indicating job growth is currently softer than previously reported. The unemployment rate remained relatively steady at 4.2%. Given this latest economic data, the Federal Reserve is expected to lower rates in their meeting later this month.
Recent Inflation Metrics Come in as Forecasted for August
Inflation metrics for August came in as expected with the broad measure rising 0.2% for the month. Core Consumer Price Index (CPI), which excludes volatile food and energy prices, increased slightly higher at 0.3%. Housing and shelter costs, which have a significant weighting in the CPI metric, increased 0.5%, contributing significantly to the increase.
Segments of the Consumer Market Continue to Weaken
There has been increasing concern regarding the resiliency of the consumer, particularly those in the lower income bracket who have been hit relatively harder with continuing high inflation. Discount retailers that cater to lower income consumers have also seen challenging times. National discount store, Big Lots recently filed for bankruptcy, citing high inflation and relatively high interest rates as factors. Similarly, other discount stores such as Dollar General and Dollar Tree have recently reported disappointing earnings results and have significantly lowered their earnings outlooks.
Inflation has also impacted small businesses. The National Federation of Independent Business (NFIB) Small Business Optimism Index, which measures optimism among small business owners, fell to 91.2 in August as that segment of the economy continues to grapple with persistent high inflation. This is the 32nd consecutive month that the NFIB index has been below its 50-year average of 98.
Strong Results for Second Quarter Earnings Season
The second quarter earnings season saw strong results from the majority of sectors, with overall year-over-year earnings growth reaching 13%. Technology, Health Care, and Financial sectors exhibited the largest year-over-year earnings growth for the second quarter, with only the Materials and Real Estate sectors seeing a decline in year-over-year earnings growth.
The S&P 500 is expected to achieve 10.2% earnings growth for 2024 compared to 2023, led primarily by the Technology, Communication Services and Financials sectors.
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Sources: BTC Capital Management, S&P Dow Jones Indices, IHS Markit, FactSet
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