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Data on Thursday showed core U.S. inflation, the measure of
sticky price pressures central bankers worry about, rose by 4.7%
in July, its slowest annual rise since October 2021. But Wall
Street stock markets ended Thursday flat. Futures point to mild
declines for the S&P 500 and the Nasdaq 100 on Friday.
A knee-jerk explanation is that it is August, with traders more
likely in Tuscany or the Hamptons than at their screens. Another
is that the much hoped-for soft landing feels confirmed and has
no buyers left.
Strategists say markets may trade sideways in coming months, as
a deep recession is avoided, but the sort of economic growth
that could power corporate earnings remains elusive.
The S&P 500 has risen 16% year-to-date. But a Goldilocks
economy, where higher interest rates quell inflation without
crushing output, looks "much priced in now," Barclays chief
European equity strategist Emmanuel Cau writes in a note.
One tailwind for global stocks this year, Cau says, was
investors reversing pessimistic trades that drove the S&P 500
19% lower in 2022. This boost, Cau concludes after reviewing
positioning data, "is largely gone." "Bullish price action," he
adds, "is looking tired."
Consultancy Capital Economics concurs, saying in a note that
"the biggest boost for risky assets from economic resilience may
be in the past." Corporate profits are expected to be
underwhelming. Analysts have cut their estimates for S&P 500
companies' 2023 earnings by about 15% since the end of last
year, Capital Economics says.
Ned Davis Research, meanwhile, notes that as the U.S Federal
Reserve shrinks its balance sheet following aggressive bond
purchases in 2020 and 2021, economic and banking liquidity is
declining. When there is less money sloshing around, they say,
stocks tend to "flail around."
Excitement about artificial intelligence may continue to support
equities, but inflows into hot stocks are often a liquidity
story too. September is shaping up to be soggy.
Key developments that should provide more direction to U.S.
markets later on Friday:
* July producer price inflation
* University of Michigan August preliminary consumer sentiment
(Reporting by Naomi Rovnick; Editing by Elaine Hardcastle)
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