Highlights for This Week Include:

• April’s employment report showed a softening labor market with lower wage inflation, consistent with the Federal Reserve’s (Fed) objective of better labor market balance and lower inflation.
• April’s U.S. service sector and manufacturing business surveys are consistent with slower economic growth. However, global business surveys suggest improving global economic momentum.
• Profits, which provide the ultimate support for stocks, continue to come in better than expected. Pullbacks of 5% - 10% are to be expected in any given year, and so far, the recent pullback looks normal within an ongoing bull market. The S&P 500 has reversed its 1-month downtrend while Treasury yields are moving lower off recent highs.

Labor Market Shows Further Signs of Softening

A major objective of the Fed’s higher interest rate policy is to cool an overheated labor market. The latest labor market report showed further progress on this objective. Nonfarm payrolls expanded by 175,000, below expectations of 240,000. Additionally, the prior two months were revised down by 22,000. Also, the average workweek ticked down to 34.3 hours from 34.4, while the unemployment rate rose to 3.9% from 3.8%.

Importantly, average hourly earnings rose 0.2%, below the consensus of 0.3%. That brought the y/y change down to 3.9% from 4.1%, below expectations of 4.0%. Wage growth moderated in both goods-producing and services industries. Notably, services wage growth came down to 3.7% y/y, the slowest pace since May 2021. Although still higher than its pre-pandemic pace of about 2.5% y/y, it suggests easing labor cost pressures in services, which is a hopeful sign for slower overall inflation.

Aggregate payrolls, which combine payrolls, hours, and earnings, grew at a 5.6% y/y rate. This implies steady support for personal income and spending growth, consistent with continued economic expansion. Overall, this report suggests the labor market is in a much better balance, consistent with the Fed’s objective.

Service Sector Conditions Suggest Slower Economic Growth

The April ISM Services PMI (a timely business survey of private service sector conditions) saw its third consecutive decline, slipping below the 50 expansion/contraction mark. However, the net number of expanding services industries eased only slightly and held well into positive territory, consistent with continued expansion. The ISM estimates that the latest services PMI corresponds with only 0.2% annualized economic growth.

Global Economic Growth Showing Encouraging Improvement

As measured by the J.P. Morgan Global Composite PMI, global economic growth improved to a ten-month high in April, as a faster increase in service sector output offset a mild growth slowdown in manufacturing production.

The economic upturn was underpinned by rising levels of new business, including a slight strengthening of international trade volumes. Breadth remains strong as economic activity rose in almost all the nations covered, the exception being Canada. Importantly, accelerating economic momentum has historically been consistent with global stock market gains.

Earnings are Once Again Coming in Better-than-Expected

With over 83% of the S&P 500’s market capitalization reported, expectations are now for earnings to grow by 10.2%. Earnings are beating estimates by 7.7% in aggregate, with 74% of companies topping projections. Earnings vary significantly among industries, with Technology and related firms showing significant earnings growth of 38% while Energy and Materials are lagging, with earnings falling 23% due to tough comparisons to last year.

Thoughts on Recent Stock Market Performance

Recent stock market performance has been encouraging, with the S&P 500 reversing its 1-month downtrend while Treasury yields are moving lower off recent highs. We continue to view the recent stock market pullback as a normal occurrence in an ongoing bull market. Major bear markets are usually associated with economic recessions, while current economic indicators are consistent with further growth. In addition, stocks are ultimately supported by corporate profits, and earnings continue to come in better than expected, as discussed above.