Weekly Market Perspectives: Weak retail sales overlooked as markets push higher

Published: June 24, 2024

Following a data-packed Fed week, few new economic reports were released last week, with retail sales as the primary focus. Markets continue to digest the data mosaic, though pessimism seemed to be slowly coming out of zeitgeist. While there will always be risks on the horizon, market strategists have been optimistically updating their projections during the bull run. As the corporate sector continues to chug along with strong margins and government policy stable (for now), the outlook is converging toward a robust economy with decent growth prospects. Capital markets seem to be following suit and continue to carry positive momentum. Markets responded with the S&P 500 Index higher by 0.6% in a holiday shortened week, while the US Aggregate Bond Index fell by 0.1% as the yield curve was fairly static.

Wall Street Strategists Can’t Keep Up with S&P 500 Rally
S&P 500 Index vs Year-End Strategist Targets

Source: Bloomberg.

Equity strategists can’t keep up. The relentless rise in the S&P 500 Index (and other equity benchmarks) is leaving Wall Street forecasters behind. Seemingly every revision is met with another leg higher in the market, leading to more revisions. With corporate earnings season around the corner, investors and strategists will get another glimpse into corporate health and will likely update their targets yet again. Generally, these forecasts get updated multiple times per year as new narratives, sentiments, and market gains or losses get incorporated. Investors should view these forecasts with a healthy dose of skepticism.

GDPNow Points to Sustained Economic Momentum
Atlanta Federal Reserve GDPNow Estimate

Source: Atlanta Federal Reserve.

As the economy has carried positive economic momentum, the GDPNow model from the Atlanta Fed estimate for real Q2 GDP growth currently stands at a robust 3.0%, albeit down from 3.1% at the latest reading. Following a large revision higher after the May ISM and jobs reports, the GDP Nowcast measure has consolidated around recent reports on stable prices, slowing retail sales, modest business investment growth, and mediocre trade data. The model is running ahead of Wall Street economist estimates for 2% Q2 GDP growth.

Retail Sales Edge Higher: Outlays Rise in May Following Downward Revisions
US Retail Sales (MoM%)

Source: Bloomberg.

Headline retail sales for May rose 0.1%, according to the Commerce Department on Tuesday, below consensus expectations for 0.3%. Of note, April figures were revised to -0.2%, down from a flat reading. Excluding volatile auto and gas sales, core retail sales advanced 0.1% in May, compared to expectations for a 0.4% increase. Consumers exercised caution and limited spending for a second straight month, suggesting price increases and higher borrowing costs are causing fatigue. While some price declines helped, the signs point to consumers becoming more cost-conscious and on the lookout for bargains. Based on several earnings reports from the corporate sector, the consumer is being forced to make tradeoffs—or trade downs—as they aim to make their dollars go further. With consumption making up more than 2/3rd of the economy, reports of a slowdown will support the case that the Federal Reserve should pull forward the first interest rate cut.

– Written by Eric Schmitz, CFA