Highlights for This Week Include:

• The strong March labor market report is a positive sign for income and consumer spending and suggests that the economy remains on solid footing.
• The Consumer Price Index (CPI) surprised to the upside and suggests a longer time frame to achieve the Federal Reserve’s 2.0% inflation target and, consequently, a longer time frame before the Fed cuts interest rates.
• Earnings season begins Friday with several money center banks. Some major insights we will be looking for include 1) the health of the consumer from the banks and consumer-facing companies, 2) whether the mega-cap stocks can exceed lofty expectations, and 3) the status of artificial intelligence investment and adoption across industries.

Labor Market Strength Remains Key to a Healthy Economy

Job creation and wage gains provide the fuel for consumer spending. Consequently, we pay close attention to labor market indicators, especially the monthly labor market report. The March report showed nonfarm payrolls expanded by 303,000, the most since last May and well above expectations of 200,000. Additionally, the prior two months were revised higher by 22,000, while the unemployment rate fell to 3.8% from 3.9%. Despite robust jobs growth, average hourly earnings slowed from a year ago to 4.1% from 4.3% (lower wage inflation is important for achieving lower overall inflation readings).

Strong employment growth is positive both for personal income and consumer spending, confirming that the economy remains on a strong growth trajectory for now.

Inflation Remains Stubbornly High

While the strong labor market is supporting a healthy economy, unfortunately, it is also a cause of stubbornly high inflation readings so far in 2024. Both CPI and core CPI (excludes food and energy) inflation surprised to the upside in March, driven by sticky shelter and other services prices. On a y/y basis, the CPI climbed 3.5%, the most in six months, and above the consensus of 3.4%. Core CPI rose at a steady 3.8% y/y rate, also above the consensus of 3.7% y/y. Super-core inflation, a gauge of underlying price pressures that is closely watched by the Fed, accelerated to 4.8% y/y, the most in nearly a year.

This stronger inflation momentum to start the year suggests a longer time frame to achieve the Fed’s 2.0% inflation target. Amid slower disinflation and continued strong economic growth, the Fed has been signaling patience on when to expect interest rate cuts.

An Earnings Season Preview

First quarter (1Q) reporting season begins Friday with several major money center banks. Consensus expects 3% year/year earnings growth for the aggregate S&P 500 index, a deceleration from the 8% growth posted in 4Q earnings season. However, this quarter’s expected growth rate is the highest pre-season bar set by consensus since 2Q 2022. Notably, aggregate results have exceeded pre-season earnings growth estimates in each of the previous four quarters by an average of 4%.

Utilities (+23%) is expected to post the greatest earnings growth, while Energy (-27%) and Materials (-24%) will see the largest declines due to the tough comparisons with last year’s first quarter. Communication Services (22%), Information Technology (21%), and Consumer Discretionary (14%) are also expected to post strong growth in 1Q.