Well, dangerous investor euphoria is now spreading like a rash on the belief, at least in the US, of a perfect soft landing as inflation is vanquished, without a recession. Cash and hedges are out, replaced by demand for everything from small caps to meme stocks. Industrial shares are on a tear, junk-bond spreads are narrowing, quants are ramping up Treasury shorts and everyone is piling into stocks.
How different from the recent talk about recession, as data on the surface at least suggests the US economy is thriving amid mounting evidence the Federal Reserve is beating inflation.
On Wednesday, Federal Reserve Chair Jerome Powell said the Fed was not forecasting a recession and did not rule out another rate hike, saying it would follow future economic data. But they would not hit their inflation target until 2025.
More than half of the firms listed on the S&P 500 have reported second quarter earnings as of Friday, out of which 78.7% have surpassed analyst expectations.
All the optimism has sent the S&P 500 to the brink of its sixth advance in seven months and pushed prices in the Nasdaq 100 to almost 35 times profit. It’s manna for bulls — even as it leaves them with precious little wiggle room should anything in the economy or monetary policy not unfold as hoped.
Economic data keeps defying bearish predictions — everything from gross domestic product to consumer confidence and hiring has beaten forecasts. Reports on Friday showed the employment cost index had its slowest advance since 2021 in the second quarter, while the Fed’s preferred inflation gauge posted the smallest increase in more than two years.
The personal consumption expenditures (PCE) price index increased 0.2 per cent last month after edging up 0.1 per cent in May, the Commerce Department said. Food prices dipped 0.1 per cent while the cost of energy products increased 0.6 per cent.
In the 12 months through June, the PCE price index advanced 3.0 per cent. That was the smallest annual gain since March 2021 and followed a 3.8 per cent rise in May.
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