Stocks are near all-time highs, and investors think interest rate cuts from the Federal Reserve are around the corner.
An overarching feeling of optimism about both the economy and markets emerges from the third volume of the Yahoo Finance Chartbook, a trend similar to that seen in volume two in late January.
Across the 32 charts compiled by economists and strategists on Wall Street, we see broad confidence that the US economy can still achieve the vaunted “soft landing” outcome following the Fed’s historic rate-hiking cycle.
Following a nearly 17% gain in the S&P 500 (^GSPC) so far this year, equity strategists see room for the bull market to run further, as many areas of the market have only recently joined the rally.
However, just past the midpoint of 2024, there is some doubt about how long this can last without significant changes.
The risks aren’t hard to find with the US presidential election looming. A stock market pullback is more than overdue, according to some market data. And a resilient economy continues to straddle the fine line between normalization from pre-pandemic trends and the start of a broader slowdown.
Economists are clamoring for changes to monetary policy to ensure the Fed can land the plane safely. Investors are also highlighting new opportunities and a potential stock market rotation as artificial intelligence enthusiasm moves into its next phase.
This volume of the Chartbook reflects markets and the economy at what Goldman Sachs economist Jan Hatzius called an “inflection point,” where many things appear the same for now — but almost everything seems on the cusp of looking quite different.
The case for cutting rates | The state of the bull market | A pending US presidential election | The health of the US economy | The market’s next move
The following commentary has been edited for length and clarity.
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
The case for cutting rates
David Kelly, chief global strategist, JPMorgan Asset Management Market Insights Team
“Stubborn inflation during the first quarter dashed hopes for aggressive policy easing this year. That said, inflation remains below its June 2022 peak, and disinflationary momentum has regathered steam in recent months. In fact, headline inflation rose by just 3.0% y/y in June, well below the 3.5% pace recorded just three months prior.
“While food and energy prices have been well-behaved and core goods have been a steady source of disinflation, gains in shelter and auto insurance have remained elevated, prolonging inflation’s journey back to the Federal Reserve’s 2% target. However, with real-time data across both categories pointing to easing price pressures, inflation should continue its slow descent and return to 2% by the middle of next year. If, as expected, inflationary pressures ease through the summer, the Federal Reserve should feel comfortable cutting rates twice this year, delivering a first cut in September.”
Goldman Sachs economics team led by Jan Hatzius
“Contrary to the predictions of some prominent economists but consistent with our own work and that of Fed Governor Christopher Waller, the normalization of the US labor market over the last two years has occurred in a very benign fashion, with a large decline in the job openings rate and only a negligible increase in the unemployment rate. In the jargon of labor economics, we have moved down the steep post-pandemic Beveridge curve and are back to the flatter pre-pandemic Beveridge curve. This means we may be approaching an inflection point at which further softening in labor demand results in a bigger and much less welcome increase in unemployment.”
Brett Ryan, senior US economist, Deutsche Bank
“The most important chart — and the impetus for the change to our [call for a September rate cut] — is the latest rental inflation data from [this month’s] CPI release. The drop in primary rents and owners’ equivalent rents in the June CPI data is a ‘game changer’ and should meaningfully boost Fed officials’ confidence that inflation remains on a trajectory back to its 2% target. To be sure, the Fed will likely want to see a couple more prints to confirm the downshift, but historically, rents have been fairly sticky — i.e., when you have a shift in either direction from [a] prior trend, it tends to persist.”
Mark Zandi, chief economist, Moody’s Analytics
“Inflation, as measured by the harmonized consumer expenditure deflator, is firmly below the Federal Reserve’s 2% target. Harmonized inflation excludes the implicit cost of homeownership, also known as owners’ equivalent rent. Measuring OER is vexed in typical times but is intractable in current times given the upside-down housing market. It is understandable the Fed doesn’t want to change the inflation measure it is targeting at this time and risk its credibility, but Fed officials should call out harmonized inflation as critical to watch. By so doing, it will make it easier for the Fed to make the case that inflation is where it needs to be for them to do the right thing and lower interest rates.”
Gregory Daco, chief economist, EY
“Given unfavorable year-on-year comparisons, PCE inflation is likely to hover around an ‘uncomfortable plateau’ around 2.6%-2.7% over the summer. While softer consumer spending growth due to increased pricing sensitivity, moderating wage growth, declining rent inflation, reduced markups, and stronger productivity growth will continue to provide a healthy disinflationary impulse, it’s not until September that inflation readings will fall below that uncomfortable plateau. We foresee headline and core PCE inflation ending the year around 2.5% [year over year].”
Michael Gapen, head of US economics, Bank of America Global Research
“We expect the contribution from fiscal [policy] to the growth rate of the US economy should moderate over time, down from the substantial contributions it made in the last six quarters. And, to a lesser degree, business spending should follow the same path. This is part of the reason we assume growth moderates and inflation decelerates.”
John Silvia, CEO and founder, Dynamic Economic Strategy
“The Fed, Powell, and others have cited these series as benchmarks for easier labor market conditions. These two series support the argument the Fed will ease in September.”
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
The state of the bull market
Liz Ann Sonders, chief investment strategist, Charles Schwab
“Over multiple periods during the past year, a historically low percentage of the S&P 500 has outperformed the index itself while churn/rotations/weakness under the surface remains acute. The better-than-expected [June] CPI report unleashed some rotation into smaller-cap stocks, and we think there will be continued bouts of that rotation. However, we recommend staying up in quality when going down the cap spectrum.”
Goldman Sachs equity strategy team led by David Kostin
“This chart shows how the market has been trading three groups of potential AI beneficiaries. The first group is stocks with revenues tied to investment in AI infrastructure, including semiconductor firms, cloud providers, and data centers, among others. The second is companies with the potential to monetize AI by generating incremental revenues. The third group contains the companies with the biggest potential earnings boost from AI-driven productivity gains. So far, investors have expressed confidence in the trajectory of AI investment, with those beneficiaries outperforming the average S&P 500 stock by nearly 30 percentage points so far this year. However, the flat performance of the other groups signals that investors remain skeptical about the longer-term impacts of AI adoption.”
Nicholas Colas, co-founder, DataTrek Research
“Low expected volatility, as measured by the CBOE VIX Index, is a common feature of bull markets. This was the case in the mid-1990s, mid-2000s, and much of the 2010s. Many market observers are worried the VIX is too low, signaling unhealthy complacency. We disagree, and the history of Wall Street’s ‘Fear Index’ supports our view.”
Citi’s US equity strategy team led by Scott Chronert
“This chart is our way of measuring how much growth markets are pricing into current index levels. Right now, we are near post-pandemic highs. This means market expectations are high for fundamentals. Basically, you need strong earnings results and follow-through in guidance to support the market or push it higher [at] these levels.”
Richard Bernstein, CEO & CIO, Richard Bernstein Advisors
“This chart shows the relationship over the last 10 years between high-yield corporate spreads and large versus small stock performance. Historically, large-cap stocks (higher quality) tend to outperform smaller-cap stocks (lower quality) when high-yield credit spreads are widening (high-quality bonds outperform low-quality bonds). However, the relationship has reversed since the end of 2022. Large-cap stocks have outperformed smaller stocks despite credit spreads narrowing. This is quite rare and conflicts with sound economic theory.”
Paul Hickey, co-founder, Bespoke Investment Group
“On July 16, the Russell 2000 closed 4.42 standard deviations above its 50-day moving average. That was not only the most overbought reading that the Russell 2000 has seen on a closing basis in its history, but for major US Indices (S&P 500, DJIA, Nasdaq, and Russell 2000), it is the most overbought reading in history!
We’ve discussed in the past how the size of the Russell 2000 in terms of its market cap (smaller than Apple, Microsoft, or Nvidia) could make it susceptible to large swings.”
Jean Boivin, head of BlackRock Investment Institute
“AI and the low-carbon transition could spur historically large capital spending — and in a much shorter space of time than previous technological revolutions. We see a possible investment boom ahead that could transform economies and markets. But the speed, scale, and impact of that investment is unclear.”
Ohsung Kwon, senior US equity strategist, Bank of America Global Research
“The de-stocking cycle over the past 18-24 months has been one of the sharpest in history, with inventory levels for the S&P 500 falling as much as it did during the prior three recessions. But the sharp inventory contraction started to moderate for the third straight month in June, suggesting that the de-stocking cycle is likely coming to an end.”
Kathy Jones, chief fixed income strategist, Schwab Center for Financial Research
“With the Treasury yield curve inverted, many investors have been reluctant to extend duration in their bond portfolios because it would mean giving up yields of more than 5%. However, staying too short increases reinvestment risk. We have been encouraging investors to look beyond the Treasury market for yield. Currently, there are opportunities to build a portfolio of yields 5% or more over the next 5 to 10 years without taking significant credit risk. Investment grade corporate bonds, agency mortgage-backed securities, and/or the Aggregate Bond Index provide the chance to capture higher yields for longer without dropping below investment grade.”
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
A pending US presidential election
Bernard Yaros, lead US economist, Oxford Economics
“Oxford Economics has modeled the macroeconomic impact of various possible election outcomes. No matter the result on Election Day, policymaking during the next presidential term will add to inflation. However, the magnitude of the inflationary boost will depend on the president and the makeup of Congress. The inflationary impact is greatest in a ‘full-blown Trump’ scenario where a Republican trifecta doubles down on tax cuts, higher defense spending, and tariffs. Even in a ‘limited Trump’ scenario, where a Republican trifecta doesn’t loosen fiscal policy or raise tariffs to the same extent, inflation is still meaningfully higher. In our ‘baseline [Democrat]’ scenario, a Democratic trifecta would expand government social benefits and partially pay for them with higher corporate taxes; inflation is higher in this scenario too. Ultimately, the inflationary boost is least under a divided government and under our ‘full-blown [Democrat]’ scenario, where a Democratic trifecta doubles down on tax increases.”
Sam Ro, editor, TKer
“Schwab strategists made a great observation about the importance of staying invested. If you started with $10,000 in 1961 and invested in the S&P 500 only when there was a Republican in the White House, your investment would’ve grown to $102,000 in 2023. If you did the same but with a Democrat in the White House, that investment would’ve grown to $500,000. But none of that compares with the $5.1 million you would’ve had if you had stayed invested the whole time, regardless of who was president. It speaks to the power of compound interest and what can happen if you miss out on it.”
Jonathan Pingle, chief economist, UBS Investment Bank
“The chart highlights the impact the supply of longer-run Treasury bonds was having on bond yields. The vertical lines are the Treasury funding announcements last year. The rising debt issuance appeared to pressure yields higher. Then, at the November announcement, the Treasury Department announced shifting issuance to short-term bills, weighing on longer-term bond yields. This could have implications for the coming expiration of the 2017 tax cuts and impact on markets of sustaining large deficits over time.”
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
The health of the US economy
Ed Yardeni and Eric Wallerstein, Yardeni Research
“We think the labor market is normalizing from the pandemic shock and do not see a recession materializing on the horizon. While the Sahm Rule approaches its recession trigger (when the three-month moving average of unemployment rises 0.5 percentage points above its low of the past year), we believe the flood of illegal immigration and the growing labor force are behind the rise in unemployment. Using the insured unemployment rate from weekly jobless claims data, which excludes new workers entering the labor force, we see little cause for concern that the labor market is cracking.”
Thomas Simons, US economist, Jefferies
“According to the JOLTS data, 47.7 million people quit their jobs in 2021, and an additional 50.6 million quit their jobs in 2022. This compares with an average of 37.9 million annually for the 5-year period leading up to the pandemic in 2020 (2015-2019). … Businesses spent enormous amounts of money on investment in human resources services to find employees, and then on increased wage costs. Often, these investments barely maintained headcount/capacity and did not generate more. By definition, this is a drag on productivity.
“Recent JOLTS data shows that turnover is slowing. The ‘Great Resignation’ has transitioned to ‘The Big Stay.’ The drag on productivity caused by labor market turnover will continue to reverse as workers stay in their jobs longer and build up skills, efficiency, and experience. As productivity improves, businesses will have less pressure to pass on higher wage costs to customers through higher prices, allowing inflation to cool further.”
Wells Fargo economics research team led by Jay Bryson
“In more than 60 years, there has never been a recession without real discretionary spending falling on a year-over-year basis. What about false positives? Turns out, they are rare. It has only happened twice; both were short trips across the zero line and the most recent was more than 35 years ago in 1987 (the other was 1967). Household spending habits these days reveal a more choosey consumer as purchasing power fades. Real non-discretionary spending has outpaced discretionary purchases on trend in recent months, consistent with a moderation in broader consumption. Real discretionary spending growth has been awfully close to breaking through the zero line this year.”
Ryan Detrick, chief market strategist, Carson Group
“Yes, inflation is up more than anyone would like, but it might surprise many that disposable incomes and employee compensation have increased more than overall inflation since the pandemic started. This is one of the main reasons we haven’t had a recession when so many expected it. The good news is we expect inflation to improve the second half of this year, so consumers should remain in good shape as incomes and compensation remain healthy.”
Claudia Sahm, founder, Sahm Consulting
“Even after adjusting for higher prices, consumer spending has risen solidly in recent years and is near its pre-COVID trend. That’s remarkable, given the depth of the recession and the subsequent spike in inflation. In the first half of 2024, the growth in real consumer spending slowed, following a robust pace in 2023. So far, that appears to be nothing unusual, but as two-thirds of the US economy, consumers will be at the center of any watch over recession risks.”
Liz Everett Krisberg, head of Bank of America Institute
“Is changing jobs worth what it used to be? In addition to finding that the rate of workers changing jobs (job-to-job (J2J) change rate) has declined relative to 2023, job hoppers are getting a smaller bump in pay from their new employers. During the height of the ‘Great Resignation,’ the median pay raises workers received when they changed jobs rose to above 20%, but as of May 2024, median pay raises for J2J movers moderated to less than half that level — around 10% YoY — and below the 2019 and 2020 average annual levels.”
Dr. Issi Romem, research fellow, ADP Research
“Even before the pandemic, the pay raise from switching jobs into a long-distance role, which is when a worker lives in a different metro than their manager, was typically greater than from switching into a local one. A couple of years after the pandemic, we started seeing something new: The advantage of switching into a long-distance role — about 8% before the pandemic — roughly doubled!
“Thicker job markets — ones that have a greater variety of both jobs and candidates — allow people and employers to better match with each other and to share the extra value that those better matches create. When the pandemic normalized long-distance work, the result was an explosion in the variety of both jobs and candidates available, or in other words: a thicker market for those embracing long-distance work. No doubt, long-distance work will also have its fair share of disadvantages, but for the economy at large, it could prove to be a newfound source of efficiency, growth, and well-being. For a fuller account, see here.”
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
The market’s next move
Binky Chadha, chief equity strategist, Deutsche Bank
“Earnings are the anchor for equity prices. The bottom-up analyst consensus and our earnings forecasts both see continued solid earnings growth and further upside for equities by year-end. How much? The forward consensus for S&P 500 EPS looks to be pointing to 5,500 and our earnings forecasts to 5,800 by year-end, but where equity prices end relative to earnings (the multiple) will depend also on the perceived speed and durability of the earnings cycle to come.”
Callie Cox, chief market strategist, Ritholtz Wealth Management
“Rate cuts are probably coming soon. And yes, they tend to happen when the economy is in trouble. But you don’t need to freak out just yet. Rate cuts tend to happen in crises, when the Fed has to swoop in and save the economy through drastic changes in interest rates.
“But rate cuts can also happen when the Fed just needs to make a small adjustment to policy. You know, take the foot off the brake pedal to get to a cruising speed on the highway. A rate cut is just a rate cut — not a sign that something ominous is on the horizon. And this particular rate cut looks to be a celebratory rate cut — one that happens because the Fed believes they finally have inflation under control. In today’s environment, that’s definitely worth celebrating.”
Kristina Hooper, chief global market strategist, Invesco
“The relationship between monetary policy and technology stocks is an important one to consider, especially since we are close to the start of rate cuts. Tech stocks are considered a ‘long duration’ asset class, which means their cash flows are considered more distant and therefore they are typically more sensitive to changes in interest rates. It is assumed that lower rates are more positive for higher duration stocks such as technology stocks.
“However, if we look at the last twenty-five years of performance of the NASDAQ Composite Index, it is clear that the relationship is more nuanced. Tech stocks were more sensitive to monetary policy tightening when their valuations were higher relative to history.
“Currently, the P/E ratio on the NASDAQ 100 is 32.72, which is higher than the historical average but not at the high end of the historical range of valuations. Therefore, I suspect that tech stocks will not be as sensitive to rate cuts going forward. I expect small caps and cyclical stocks to outperform tech stocks as markets anticipate an economic re-acceleration in coming months — but I still expect tech stocks to react positively to rate cuts.”
Michael Kantrowitz, chief investment strategist, Piper Sandler
“We’ve been bullish on equities in 2024, with the view that we’re in a “softilocks” backdrop of softening macro activity and moderating inflation. This helps to bring down interest rates and provide room for the Fed to cut rates, something that will continue to propel the bullish soft landing narrative for stocks and the economy.”
Brian Belski, chief investment strategist, BMO Capital Markets
“We are still skeptical that the 5.5% drawdown that occurred during March-April will be the worst for the S&P 500 this year given historical data that shows an average drawdown of 9.4% for the second year of bull markets historically. However, we are now convinced that should a more severe pullback happen over the near term, it will likely occur at higher index levels than we previously anticipated. Therefore, the eventual rebound, which has averaged roughly 14.5% historically, will begin at a higher base, suggesting to us that stocks have plenty of room to run through year-end.”
Keith Lerner, co-chief investment officer, Truist Advisory Services
“Since 1950, there have been 27 years where the S&P 500 gained more than 10% in the first half on a total return basis, such as what occurred this year. In the second half following these periods, the S&P 500 has averaged an additional gain of 9%. The index has risen in 24 of 27 such periods, despite seeing an average peak-to-trough pullback of 9% at some point.”
Click here to download YF Chartbook Vol. 3 (Open Link in New Tab on desktop)
This project would not be possible without the work of Yahoo Finance Senior Editor Brent Sanchez, who turned Wall Street jargon into a digestible visual presentation of the current market moment. And a special thanks to Yahoo Finance’s team of editors who worked on this project, including Myles Udland, Adriana Belmonte, Grace O’Donnell, Becca Evans, and Anjali Robins.
Most of all, thank you to all of the experts who contributed their time and thought to this project and helped make this Chartbook such a valuable snapshot in economic time.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer. Have thoughts on volume three of the Yahoo Finance Chartbook? Email him at [email protected]
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