Markets see worst day since 2022, but then regain ground

MANHATTAN (CN) — Wall Street looked ready to have a horrible week as Big Tech earnings disappointed, but by the closing bell Friday investors managed to rally on good inflation data.

Corporate earnings from Tesla and Alphabet — with the former showing a 43% loss of earnings per share for the second quarter — sapped equities early in the week. However, a raft of good inflation and growth data came to the rescue.

By the closing bell Friday, the Dow Jones Industrial Average had gained 302 points for the week. The S&P 500 and Nasdaq suffered massive losses Wednesday, dropping 2.3% and 36%, respectively. However, the Nasdaq dropped 369 points this week, while the S&P 500 lost just 46 points.

“Investors are interested in taking more risk as the so-called soft landing looks more likely,” said Jeffrey Roach, chief economist for LPL Financial. “We have an economy with low unemployment [and] rising wages, decelerating inflation, and a Fed on the cusp of cutting rates. What more could you ask for?”

On Friday the U.S. Bureau of Economic Analysis reported its monthly inflation reading for June, which came in at expectations with a 0.1% month-over-month increase in the personal consumption expenditures price index. Prices for goods actually decreased, while prices for services increased by 0.2% in June.

The best news from the report was that rent prices gained just 0.26%, which are at pre-pandemic averages, and overall it points to the Federal Reserve hinting at a rate cut in September when the central bank meets next week.

“The Fed won’t see a glaring reason to immediately cut interest rates,” said Comerica chief economist Bill Adams. “The Fed might cut rates faster if the jobs market deteriorates sharply, but that seems unlikely.”

The BEA earlier in the week gave its advance estimate on gross domestic product for the second quarter of the year, which the agency said rose by 2.8%. The main contributors were among the health care, housing, and motor vehicles sectors.

The reading, which isn’t the agency’s final word on the second quarter, came in well above the consensus estimate of 2% growth. “The U.S. economy is much stronger than people realize, and to the extent that markets were worried about a growth slowdown, they should breathe a sigh of relief,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.

Despite the lull in the U.S. economy seen during the first quarter, growth is strong again, and most economists now peg the U.S. economy to grow 2.3% in 2024 before dropping below 2% in 2025.

Consumer sentiment has yet to recover, though. According to the University of Michigan’s latest monthly survey, sentiment dropped again, this time from 68.2 in June to 66.4 in July. Consumer expectations and the “current conditions” index both also nudged slightly downwards.

“Continued strength in consumer spending is consistent with the fact that sentiment among wealthy and high-income consumers — those with the most purchasing power — which has climbed sharply over the past two years,” said survey chief economist Joanne Hsu in a statement.

She noted they generate a disproportionate share of spending, while “the burden of high prices continue to drag down sentiment for less wealthy consumers.”

Experts say the downward trend in sentiment should pick up starting next month. “With the methodological transition behind us, and further disinflation and interest rate cuts on the horizon, we expect that the index will begin to rebound,” Grace Zwemmer, associate economist at Oxford Economics, wrote in an investor’s note. “However, a gentle rise in unemployment over the next quarters may temper future gains in the index.”

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