A Little Less Bang

I remember playing with fireworks as a kid. My brother and a friend would go play nine holes at the local par-3 course then hit an abandoned parking lot with a great view of the airplanes taking off and landing at Pittsburgh International. The parking lot offered great open space to launch fireworks. We spent many summer nights running that routine.

Our fireworks show would start off pretty well given our limited supplies, but would eventually peter out to just some stuff burning up that barely took flight.

The U.S. economy seems to be experiencing a similar trajectory. It’s been running remarkably hot given the adjustment to interest rates and now appears to be cooling off. That’s not unsurprising. In fact, the robust economy over the last 18 months was the surprise.

economy seems to be experiencing a similar trajectory.

This week, we got fresh data on the labor market, which is the most critical component to our economy. The government’s latest jobs report showed businesses added 206,000 jobs last month. Another very healthy number.

But, the report also revised down the previous two months, lopping off more 110,000 jobs in total. Also, the unemployment rate, derived from surveying households, ticked up another notch to 4.1%. It had been as low as 3.4% early last year.

None of this suggests the economy is in trouble. It’s simply cooling from the breakneck speed it had been travelling. It’s a firecracker with a little less bang. And, it’s beginning to more closely resemble our pre-Covid economy. The big question: where does this coolness stop? Cool may be fine. Cold (recession) is not.

None of this suggests the economy is in trouble.

So far, the stock market has been happy with the cooling economy. It’s helping keep long-term rates from accelerating higher. And, it’s inching us closer to the Fed cutting short-term rates. The market is now expecting cuts to begin in September.

The key for the markets will be for consumers and the economy to hold up just enough for the very hot earnings expectations to materialize. Analysts are forecasting S&P 500 earnings growth to top 10% for the remainder of this year, next year and even into 2026. That’s well above the long-term average.

On its face, that may seem a bit crazy, but not when you factor the S&P 500’s heavy concentration on just a handful of stocks. Companies caught up in the AI story. If many of the largest companies in the world are also running in the River of AI, they may have the ability to continue growing at a fast clip. And, that will in turn, keep the overall market growing as a faster pace.

On its face, that may seem a bit crazy, but not when you factor the S&P 500’s heavy concentration on just a handful of stocks.

Of course, that’s not without risk even if it feels carefree at the moment. We’ll unpack all that in a future newsletter. In the meantime, we’ll start to get a fresh look at corporate profits next week as earnings season kicks off.

We’ll be watching and will keep you abreast of major developments as they happen.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

This material is provided as a courtesy and for educational purposes only.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.