Will the Stock Market Continue to Rally?

The recent data have reinforced our confidence that inflation is rapidly falling to an acceptable level, and the strong economic data supports the idea that the US economy will not enter a significant recession. Recent earnings reports, economic and inflation data, CPI, PPI, and bank earnings, strengthen the soft-landing narrative. Stocks could continue to gain momentum in the week ahead as investors turn their attention to earnings results after the past week's softer inflation news. The market will continue gaining steam as investors come off the sidelines for fear of further missing out on the current market rally.

Throughout the year, there have been consistent calls for a potential recession, but these predictions have been repeatedly postponed due to strong economic indicators, particularly in the labor market. In June, the US inflation saw a significant decline, with the consumer price index rising only 3%, marking the smallest increase over two years. Additionally, producer prices remained relatively stable during this period.

Positive trends in inflation data would likely persist until September. Economists are coming around to the notion that an imminent recession is not on the horizon. However, we acknowledge the possibility of an economic downturn if the Federal Reserve were to over-tighten its monetary policies. Central-bank officials should aim for only one more interest rate hike and then halt further increases.

There is a concern that the Federal Reserve could cause real harm to the economy and the soft landing narrative if it rushes to achieve the 2% inflation target. If the Federal Reserve pursues this goal too aggressively, it risks disrupting demand to an unhealthy extent and causing undesirable economic consequences.

Goldman Sachs has recently revised its projection, estimating a 20% chance of the US economy entering a recession within the next 12 months. This new outlook comes after previously projecting a slightly higher 25% chance, but it remains significantly below the consensus estimates from the Wall Street Journal, which indicates a 54% chance of a recession.

In a note titled "The Narrative Turns," Goldman Sachs' chief economist, Jan Hatzius, expressed confidence that the recent economic data supports the belief that achieving an acceptable level of inflation will not necessitate a recession.

The US economy has been under close scrutiny as investors anxiously monitor the impact of the Federal Reserve's interest rate hikes. However, the latest economic indicators portray a resilient economy. The June jobs report revealed an unemployment rate of 3.6%, historically low, and average hourly wages saw a 4.4% increase compared to the previous year, with the labor market adding 209,000 nonfarm payrolls in that month.

Moreover, the recent Consumer Prices Index report indicated the slowest pace of inflation since March 2021. Several key indicators, including the decline in the unemployment rate, a surge in consumer sentiment reaching levels not seen in almost two years, and a reversal in the upward trend of weekly jobless claims, all of which point to the economy's strength.

Economists expect some deceleration in the coming quarters due to slower real disposable personal income growth, especially when accounting for the resumption of student debt payments in October and reduced bank lending. Despite those headwinds, there are positive aspects such as easing financial conditions, a rebound in the housing market, and a thriving factory sector, all suggesting continued growth for the US economy, albeit at a below-trend pace.

This optimistic economic outlook has led some strategists and economists to refer to a "Goldilocks" scenario, where inflation cools, but the economy does not tip into a recession. A Goldilocks scenario represents a period of full employment, economic stability, and steady growth.

Notwithstanding the positive sentiment, not all economists share the same rosy outlook into 2024, with some still anticipating some level of recession at the start of the next year. While the Goldilocks scenario seems plausible, there are potential economic concerns. For instance, 3% inflation is higher than desired, as the Fed's target is 2%, and core inflation (excluding food and energy) currently stands at 4.8%.

The stock market may also be experiencing potential overheating, especially if earnings season triggers a further surge in the S&P 500, which has already rallied 26% from its October lows.

In summary, while the overall economic picture is showing improvement, there remain factors that could impact the economy in the coming months. While the Goldilocks scenario is being considered, it may still be too early to confidently declare victory, but if you wait for all of the economic headwinds to subside, you will continue to miss a substantial stock market rally.

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​This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

The views expressed are the views of Infinitus Wealth Management, LLC. These views are subject to change at any time and may not represent the views of all portfolio management teams, Wealth Advisors, or other Investment Professionals. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Infinitus Wealth Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Investment Advice will be given to individual clients based on risk tolerance, time horizon, investment objectives, and other considerations.

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