Wall Street regains lost ground as economy slows, tech earnings pop

MANHATTAN (CN) — Bears retreated this week, as markets regained some of the lost ground despite sticky inflation and slowing growth.

The Nasdaq gained 645 points during the week, with the largest gains coming on Friday. The Dow Jones Industrial Average and S&P 500 saw lesser weekly gains at 253 points and 132 points, respectively.

Markets were propped up mostly by a raft positive earnings reports from Big Tech, such as Microsoft and Alphabet, as well as the latest inflationary data coming in mostly in line with expectations.

Friday’s personal consumption expenditures report from the U.S. Bureau of Economic Analysis showed inflation picked up by 0.3% last month, in line with expectations, while annualized inflation rose slightly more than forecast at 2.7%.

Services were the big driver in prices, picking up 0.4%, while goods gained by just 0.1%. The bureau also noted in the report that the personal savings rate had fallen to 3.2 from 3.6%.

“Markets should breathe a sigh of relief,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. However, “the market is going to need to get over the hopes for Fed rate cuts,” he continued, noting the geopolitical events and future inflation data could impact markets. “It’s not going to a be a smooth ride this year."

Earlier in the week, the bureau released its advance estimate for gross domestic product in the first quarter of 2024, which showed a 1.6% increase. This was a half-percentage point less than what most had expected and the slowest growth seen since mid-2022.

Markets dropped once again on the report, with experts worried on its impact on interest rates. “This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” Zaccarelli said.

Others say the advance estimate portends further slowing, though that could actually be a boon to investors hoping the Federal Reserve will cut interest rates sometime this summer.

“The economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge,” said LPL chief economist Jeffrey Roach. “We should expect inflation will ease throughout the year as aggregate demand slows, although the path to the Fed’s 2% target still looks a long ways off.”

The latest consumer sentiment index from the University of Michigan also indicates a negative outlook going forward. The index for April shows a slight decrease from 79.4 to 77.2, while the consumer expectations also dipped from 77.4 in March to 76 in April.

“For a third consecutive month, sentiment has been virtually unchanged, as consumers perceived few developments this year that would take the economy off its current path,” said survey chief economist Joanne Hsu in a statement.

Hsu noted there is no evidence that global geopolitical factors, such as the conflict in the Middle East and the war in Ukraine, have had any major impact on consumers, but “consumers continued to express uncertainty about the future trajectory of the economy pending the outcomes of the upcoming election.”

Some experts say the latest Michigan sentiment index should be looked at skeptically since the university has shifted from phone calls to a new web-based methodology that could skew the results.

“The switch will create a break in the series, but the University of Michigan will smooth in the new data over the next four months, meaning the monthly changes between now and then summer will be biased lower,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in an investor’s note. He added “we should expect additional volatility, as well as potentially larger revisions in the months ahead.”

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