By Teresa Rivas
The market took a bruising on Thursday, only to have tech swoop in like a crepuscular hero after hours to save the day. The S&P 500 index was on track to finish the week up 2.6%.
Two earnings reports can't undo inflation, however. The market still has to work through legitimate worries.
Thursday's data served up a double whammy. The Federal Reserve's preferred inflation gauge, the personal consumption expenditures price index, grew at an annualized rate of 3.4% in the first quarter, nearly double the fourth quarter's 1.8%. Meanwhile, inflation-adjusted gross domestic product grew at an annualized rate of 1.6% in the first quarter, according to the Bureau of Economic Analysis, below economists' expected 2.2% growth.
The combination of high prices and slower growth set loose fears of stagflation to send markets tumbling. Facebook parent Meta Platforms was in free fall on Thursday as it noted it would have to spend billions more than planned on artificial intelligence even as it projected light second-quarter revenue. Spending more and expecting less? Big Tech companies, they're just like us!
Nonetheless, robust results from Microsoft and Google parent Alphabet after the bell sent those shares soaring and bolstered the case that AI is alive and well, and not a money sink. That allowed stocks to zoom higher on Friday, brushing past March's PCE uptick.
Microsoft and Google's results were a relief, but inflation is undeniably looking higher for longer, further delaying any potential rate cut. Little wonder, then, that the yield on 10-year Treasuries rose to 4.706% on Thursday, putting yields up 0.514 percentage point this month.
"Inflation metrics are the most important economic indicators right now, and the more they point towards sticky inflation, the higher the 10-year yield will rise and the stronger the headwind on stocks," writes Sevens Report founder Tom Essaye.
After a killer first quarter, Barron's has noted , investors should have more modest expectations for the rest of the year, as rate cuts keep getting pushed back and geopolitical worries worsen. This past week's market action dovetails with that view.
Still, modest doesn't mean negative. Inflation's persistence above the Fed's 2% target is frustrating, but higher income and spending data for March means we likely aren't staring down a recession. Indeed, the rebound in real consumption means second-quarter GDP looks on track for a 3% gain, "suggesting that fears of stagflation are badly misplaced," according to Paul Ashworth, Capital Economics' chief North America economist.
That might not be the kind of home run that fueled much of the first-quarter rally, but it's better than the gloom that dominated Thursday's decline.
David Lefkowitz, UBS' U.S. equities head, notes that despite recent stubborn inflation readings, "disinflation trends remain in place." Corporate prices are moderating, wage pressure is easing, and consumer inflation expectations are contained. "The environment for U.S. stocks remains favorable."
The average price target for the S&P 500 is still well above 5700, implying a double-digit return. That road might look longer and bumpier than it did at the end of March, but the market hasn't yet lost its way.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 26, 2024 13:23 ET (17:23 GMT)
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