17 charts to consider as stocks rally and the economy cools 📉📊📈

The S&P 500 has rallied to new all-time highs, up 11.9% year-to-date, despite a cooling U.S. economy characterized by slowing job growth, rising inflation expectations, and deteriorating consumer sentiment. This market strength is primarily attributed to robust U.S. corporate earnings growth, which continues to outpace global peers, and positive operating leverage from companies' cost structure adjustments. While an anticipated Fed rate cut's market impact is contingent on its ability to sustain economic expansion, the outlook is tempered by potential tariff-driven inflation and a shift in speculative activity towards complex leveraged products.

Analysis

The U.S. stock market is exhibiting a significant divergence from the underlying economy, with the S&P 500 reaching new all-time highs and posting an 11.9% year-to-date gain despite clear signs of economic cooling. This resilience is primarily attributed to the strength of corporate earnings, which are structurally different from GDP, as S&P 500 profits are more evenly split between goods and services compared to the services-dominated U.S. economy. U.S. earnings growth prospects are noted as being the strongest globally, with companies demonstrating positive operating leverage where modest sales growth is translating into robust profit growth due to post-pandemic cost optimizations. This bullish earnings outlook is supported by historical technicals, which show that strong multi-month rallies and all-time highs are often followed by above-average returns. However, significant macroeconomic headwinds persist, including a deteriorating labor market evidenced by rising unemployment claims, slumping job-finding expectations, and a major downward revision of 911,000 jobs. Furthermore, inflation remains a concern, with the CPI ticking up to 2.9% and companies indicating plans to pass on potential tariff costs to consumers, which could exacerbate price pressures. The anticipated Federal Reserve rate cut is not a guaranteed panacea, as its market impact is historically contingent on its ability to sustain economic expansion and corporate earnings growth.

Key Decisions for Investors

• Investors should maintain focus on large-cap US equities, where strong earnings momentum and positive operating leverage are currently outweighing cooling macroeconomic indicators.
• Closely monitor inflation data and company guidance on tariff mitigation, as the prevalent strategy of raising prices poses a dual risk to corporate margins and broader economic stability.
• Avoid selling into strength based solely on reaching all-time highs or economic weakness, as historical data indicates market momentum often continues and the primary driver remains the earnings outlook, not the Fed's actions alone.
• Evaluate the impact of a cooling labor market and deteriorating consumer sentiment on future revenue forecasts, as the divergence between resilient corporate performance and weakening household-level economics cannot persist indefinitely.