Highlights for This Week Include:

• The preliminary August business surveys remain consistent with further economic growth for both the U.S. and internationally. These surveys are also consistent with lower inflation.
• Consumer confidence and the Chicago Federal Reserve (Fed) National Activity Index also came in consistent with further growth.
• Federal Reserve Chairman Jay Powell’s speech at the Jackson Hole Economic Symposium confirmed that interest rate cuts are on the horizon. The Fed does not want to see any more weakening in the labor market while confidence has increased that inflation is headed back to its 2.0% target.
• The stock market’s strong rebound from the early August low is an encouraging signal, with the S&P 500 close to retesting the July all-time high. However, we are seeing more defensive leadership coming from Health Care, Utilities, Consumer Staples, and Real Estate. See below for details.

Early Look at August Business Surveys Consistent with Further Economic Growth

The S&P Global Flash U.S. Composite PMI is a preliminary business survey that gives a first look at private sector activity for the current month and includes manufacturing and service activity. While the survey edged down in August, it came in better than expected and has remained in expansion territory (signaling positive economic growth) since February 2023. Moreover, the current level is higher than the average for this year and is running close to its historical mean, indicating a robust pace of private sector growth. Importantly, price pressures were little changed and close to pre-pandemic levels, consistent with lower inflation.

Recent strength is ascribed solely to services activity (by far the largest sector of the economy), which picked up from the prior month and is expanding near its fastest pace since the spring of 2022. In contrast, manufacturing activity contracted for a second consecutive month and at the steepest rate so far this year. Manufacturing has been under sustained pressure after booming during the pandemic. Tight monetary policy (high interest rates) is also a bigger headwind for manufacturing than for the less interest-rate-sensitive services sector. The sector should benefit from Fed interest rate cuts likely starting in September.

The Chicago Fed National Activity Index (CFNAI) also remained consistent with slower, but still positive, economic growth. Meanwhile, the Atlanta Fed GDPNow model is signaling third-quarter growth of 2.0%.

Several other large economies reported flash PMIs for the month of August, with most showing signs of a pick-up in momentum, consistent with further global economic growth. Flash composite PMIs for the eurozone, Japan, the U.K., and Australia indicated faster growth and beat consensus estimates where available. India’s composite PMI was little changed at 60.5, maintaining its reign as one of the world’s highest readings. The services sector took the lead, as has been the case for some time globally, with accelerating growth observed among almost all the economies.

Consumer Confidence Shows Improvement

The Conference Board’s Consumer Confidence Index showed better-than-expected improvement. Although confidence has been range-bound over the past two years, the latest reading was the highest in six months, indicating cautious optimism about the economy. It is consistent with continued economic expansion. Both the present situation and consumer expectations improved this month, with expectations hitting their best level in a year. Consumer inflation expectations (watched by the Fed) continued to ease, inching closer to their pre-pandemic level.

An Update on the Federal Reserve and Outlook for Interest Rates

Federal Reserve Chairman Jay Powell’s speech at the Jackson Hole Economic Symposium confirmed that interest rate cuts are on the horizon. The Fed does not want to see any more weakening in the labor market while confidence has increased that inflation is headed back to its 2.0% target. Interest rate markets are now assigning the highest probability to a 0.25% interest rate cut at the September Fed meeting.

Thoughts on Stock Market Dynamics and Earnings Season

The stock market’s strong rebound from the early August low is an encouraging signal, with the S&P 500 now close to its all-time high. Given the still positive economic backdrop with lower inflation noted above, this suggests the current correction is a normal pullback within an ongoing bull market. However, we are seeing more defensive leadership coming from Health Care, Utilities, Consumer Staples, and Real Estate, which needs to be respected.

Corporate profits continue to come in better than expected, supported by a healthy second-quarter economic backdrop. Second-quarter earnings reporting season is winding down, with over 97% of the S&P 500’s market capitalization having reported. Second-quarter earnings show growth of 11.6% y/y. The better-than-expected earnings growth is similar to recent quarterly results. Earnings have beat estimates by 5.6%, with 74% of companies topping projections. Information Technology and Communication Services delivered the fastest earnings growth at the sector level, led by the mega-cap tech stocks.

Analysts are now expecting third-quarter earnings growth of 5.0%, with recent history suggesting that earnings will come in higher.