After a string of record highs, the S&P 500’s attempt at another on Thursday has coincided with a surprisingly strong report on U.S. gross domestic product in the fourth quarter.
Overall, the GDP report was “good,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview Thursday. It was “probably the healthiest mix you could get at this point,” he added.
The U.S. economy so far hasn’t buckled under the Federal Reserve’s monetary tightening, which is aimed at lowering inflation to the central bank’s 2% target rate. The Bureau of Economic Analysis estimated Thursday that GDP expanded at an annual rate of 3.3% in the fourth quarter, beating economists’ forecasts.
The GDP report released Thursday showed “pretty nice noninflationary growth,” Gordon said, with the data painting a picture of a “soft landing” scenario for the economy.
Core data from the personal-consumption-expenditures price index increased at a 2% annualized rate in the fourth quarter, the same pace as in the preceding three months, according to the report. Core PCE, which excludes food and energy prices, is the Fed’s preferred inflation gauge.
“For the Fed, core PCE is a critical benchmark,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors, in emailed comments Thursday.
“As evidence mounts that the Powell Fed’s so-called ‘immaculate disinflation’ goal may be coming into view,” he said, referring to Fed Chair Jerome Powell, “the potential for interest-rate cuts accompanying the economy into a soft landing rather than outright contraction appears to be increasing.”
Investors will get a fresh reading on December inflation from the PCE index, due out before the U.S. stock market opens on Friday.
Even if “the economy is not out of the woods,” the surprisingly strong GDP report on Thursday, along with other recent economic data, should “spark a bit of optimism,” Baird said.
Stocks were mostly rising on Thursday afternoon, with the S&P 500
SPX
on track to gain for a sixth straight day, according to FactSet data, at last check. That would mark its fifth consecutive day closing at a record high.
The S&P 500 was up 0.2%, while the Dow Jones Industrial Average
DJIA
was gaining 0.2% and the technology-heavy Nasdaq Composite
COMP
was slipping 0.1%, FactSet data show, at last check.
“Consumers may have been the catalyst for the unexpectedly strong [fourth-quarter] advance, but business investment, government spending and net exports also chipped in meaningfully as well,” Baird said of the GDP report.
Estimated GDP growth in the fourth quarter was slower than the strong annual pace of 4.9% seen during the third quarter. The Fed has been aiming to cool the economy in order to bring down inflation without triggering a recession.
While housing and manufacturing have experienced weakness in the economy, the service sector has held up and the labor market has been resilient, with a historically low unemployment rate, Gordon noted.
He said he has penciled in three potential rate cuts by the Fed this year against the backdrop of easing inflation, but he added that “a lot of it hinges on the labor market.”
Meanwhile, lagging areas of the stock market may benefit should housing and manufacturing recover this year, he said, pointing to small-cap equities and cyclical stocks as examples.
Read: Tech has fueled large-cap stocks this year. It hasn’t boosted struggling small caps.
Small-cap stocks in the U.S. are down, with the Russell 2000 index
RUT
dropping 2.8% so far this year, as of Thursday afternoon trading.
By contrast, the S&P 500, a gauge of large-cap stocks that has heavy weighting in a small group of Big Tech stocks, has climbed more than 2% so far this year, according to FactSet data, at last check.
Meanwhile, companies have been reporting their fourth-quarter earnings results.
“The key for the earnings season will be what companies say about their revenue guidance,” said Gordon. “You can’t just cost-cut your way to glory.”
