This week’s stock market rebound came to a screeching halt thanks to a disappointing reading on economic growth and mounting price pressures.
Thursday’s session got off to a rocky start as market participants reacted to sharply slower economic growth and a jump in a key measure of inflation.
The initial reading of first-quarter gross domestic product (GDP) came in at a 1.6% annualized rate, according to the Bureau of Economic Analysis. That was well below economists’ estimate of 2.4%, as well as the slowest rate of growth since the second quarter of 2022.
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Although slower economic growth should theoretically help the Federal Reserve in its fight against inflation, the GDP report also revealed that price pressures mounted at the fastest pace in almost a year.
The Fed’s preferred inflation gauge – the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy costs – surged 3.7% in Q1. That was the biggest increase in nearly 12 months. Recall that the Fed’s long-term inflation target, which is informed by core PCE, is 2%.
While slower growth and rising prices prompted some pearl-clutching over the possibility of stagflation, most economists were more measured in their analyses.
“The sharp slowdown in real consumer spending growth in the first quarter should restore some faith that the Fed’s restrictive monetary policy is having a dampening impact on consumer demand, since most of the weakness came from interest-rate sensitive spending,” writes Scott Anderson, chief U.S. economist at BMO Capital Markets. “On the other hand, the broad price inflation resurgence we saw in this report will give the FOMC pause that their work to vanquish the inflation monster is nowhere near complete.”
Suffice to say, more evidence that inflation is far from whipped once again threw the timing of the Federal Open Market Committee’s (FOMC) rate-cutting plans into question. Traders now think there’s just a 29% chance the FOMC will enact its first quarter-point cut to the federal funds rate in July, according to CME Group’s FedWatch Tool, down from 38% a day ago.
At the closing bell, the blue-chip Dow Jones Industrial Average was off nearly 1% at 38,085, while the broader S&P 500 shed 0.5% to 5,048. The tech-heavy Nasdaq Composite declined 0.6% to 15,611.
A heavy day of corporate earnings reports was overshadowed by the big bomb dropped by Meta Platforms (META) the previous evening. Although the Facebook, Instagram and WhatsApp parent easily topped analysts’ top- and bottom-line estimates, META discovered Thursday that stocks are forward looking.
After all, what spooked the market was guidance. Meta said second-quarter revenue would be lower than Wall Street‘s average estimate. What’s more, the company issued a higher-than-expected outlook for costs as it ramps up spending on artificial intelligence (AI).
Profligate spending was a major issue for META shareholders before the company slashed costs last year, a period CEO Mark Zuckerberg dubbed “the year of efficiency.”
The steep slowdown in expected revenue and increased costs sparked a rout in META stock. Shares lost 10.6% Thursday, shedding $132 billion in market capitalization in the process. For context, that’s essentially the entire market value of the Lowe’s (LOW) home improvement chain.
META bulls contend the selloff is a chance to pick up shares on the cheap. Jefferies analyst Brent Thill maintained a Buy rating after earnings, although he did cut his price target to $540 from $585 in an April 25 report.
“The acceleration in Q1 revenue growth to 27% year-over-year (from 22%) is likely being overshadowed by the implied Q2 revenue growth deceleration to 18% year-over-year … and increases in fiscal 2024 total expense and capex outlooks,” Thill says.
META’s results might have disappointed the market, but participants will get a chance to bid equities back up with a number of other Magnificent 7 stocks set to report. Microsoft (MSFT) and Amazon.com (AMZN) – both of which happen to be among analysts’ top-rated Dow Jones stocks – now loom even larger on the earnings calendar.
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