First-quarter profits, which provide the ultimate support for stocks, continue to come in better than expected.

Highlights for This Week Include

  • Current economic indicators, including state-level indexes and the Conference Board’s Coincident Economic Index (CEI), remain consistent with healthy economic growth. However, the Conference Board’s Leading Economic Index continues to point to slower growth ahead.
  • First-quarter profits, which provide the ultimate support for stocks, continue to come in better than expected. Current healthy economic readings should support second-quarter profit growth.
  • Major U.S. stock indexes continue to make new all-time highs, while global stocks have also broken out to new highs. Healthy economic readings, better-than-expected profits, and major stock indexes at all-time highs support a positive outlook.

Current Economic Readings Consistent with Healthy Growth

The Philly Fed state coincident indexes, designed to summarize current economic conditions for each state, increased in 43 states in April, decreased in four, and were unchanged in three states. This remains consistent with a broad-based expansion.

The U.S. coincident index, based on the same methodology as the state indexes, rose 0.2%, a downtick from the prior month’s 0.3% gain, but matching its historical average. The y/y change eased to 2.8%, about in line with the 2.7% pre-pandemic pace. It shows continued moderation in growth, but far from recessionary levels.

The Conference Board’s Coincident Economic Index (CEI) for the U.S., designed to provide an indication of the current state of the economy, rose in both April and March. As a result, the CEI showed a slight acceleration over the six-month period ending April 2024, compared to the previous six months.

The CEI’s component indicators—payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production—are included among the data used to determine recessions in the U.S. All four components of the index improved last month with personal income making the largest positive contribution. Meanwhile, the Blue-Chip consensus is calling for a little over 2.0% second-quarter growth rate.

But Leading Indicators Still Flashing Slower Growth Ahead

The Conference Board’s Leading Economic Index (LEI), designed to provide an early indication of significant turning points in the business cycle, fell again in April and has declined in 25 of the past 26 months. Due to the unique post-pandemic recovery, with the economy drawing strength from excess savings, government spending, and favorable credit conditions, among other factors, the current decline has not led to a recession.

However, the Conference Board notes serious headwinds to growth ahead, including elevated inflation, high interest rates, rising household debt, and depleted pandemic savings. Consequently, they expect a significant slowdown in economic growth ahead, although no recession.

Earnings, Led by Technology, Continue to Come in Better than Expected

With over 96% of the S&P 500’s market capitalization reported, expectations are now for earnings to grow by 10.6%. Earnings are beating estimates by 7.2% in aggregate, with 74% of companies topping projections. Earnings vary significantly among industries, with Technology and related firms showing significant earnings growth of 40% while Energy and Materials are lagging, with earnings falling 23% due to tough comparisons to last year.

Thoughts on Recent Stock Market Performance

Major stock market averages are at all-time highs, while global stocks, in a confirming signal, are also making new highs. In support, Treasury yields remain below key technical levels. Key commodities, mainly oil, remain below important levels, which supports the outlook for lower inflation. The U.S. dollar remains below key levels, which is a risk-on signal, especially for global stocks. Corporate bonds are also signaling a low rate of future defaults, which is a bullish signal for stocks. Importantly, stocks are ultimately supported by corporate profits, and earnings continue to come in better than expected, as discussed above.

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