Cycle Watch | May 2024 Continued growth projected over 2024

Key takeaways:

• Solid economic activity in Q1 prompted a change in our forecast. We no longer project a recession in 2024 and hiring and consumer spending is expected to remain resilient for some time.
• Job gains were weaker in April, and hiring was concentrated in a few industries, suggesting broadly slower worker demand.
• Services inflation surged in the first quarter, and input costs for the services sector spiked in April, indicating continued price pressures in the coming months.
• “Sticky” inflation should further delay Federal Reserve rate cuts, with restrictive monetary policy persisting longer and lifting recession risks beyond this year.

Economic review: Key indicators driving the economy

A mix of positive and negative indicators characterizes the current economic landscape. Nonfarm payroll growth has dipped to a six-month low, signaling a potential slowdown in employment despite a still-low unemployment rate of 3.9%. The financial sector is experiencing increased volatility as the 2024 election nears, with the first Federal Reserve rate cut not anticipated until late 2024. Consumer sentiment has weakened, impacted by high inflation and disappointing retail sales data. On a brighter note, business investment is rising, with manufacturing entering expansion territory for the first time since December 2022. Lastly, inflation in core services has seen year-on-year growth, likely influenced by the Federal Reserve’s tight policy stance, with residential rent prices continuing to climb rapidly.

Financial review: Key indicators impacting the markets

Various indicators with varying sentiments currently influence the financial markets. Earnings show a positive outlook, with S&P 500® Index earnings expected to grow by about 10% year-over-year, instilling confidence in market gains. Valuations are unfavorable as the S&P 500’s valuation seems stretched at 20-26 times forward earnings, although supported by low rates and resilient margins. The Fiscal/Monetary Backdrop is positive, with the Federal Reserve maintaining a data-dependent and accommodative monetary policy. Credit cycle indicators are also positive, evidenced by tight, high-yield credit spreads that reflect confidence in the U.S. economic growth outlook. Lastly, equity sentiment is mixed; despite declines in April, market breadth was not significantly affected, and the overall sentiment is a balance between fear and greed.