A Promising Outlook for the Economy
The GDP report indicates a scenario of “soft landing” for the economy, with “pretty nice noninflationary growth,” according to Gordon. The core data from the personal-consumption-expenditures (PCE) price index, the Fed’s preferred gauge of inflation, showed an annualized increase of 2% in the fourth quarter. This maintained the same pace as the previous three months.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, emphasized the significance of the core PCE as a critical benchmark for the Fed. Despite some continued concerns about the state of the economy, Baird believes that the surprisingly strong GDP report, combined with recent positive economic data, should bring about a sense of optimism.
Market Performance
At the time of reporting, the S&P 500 was up 0.2%, on track to secure its sixth consecutive day of gains, as per FactSet data. The Dow Jones Industrial Average (DJIA) was also up 0.2%, while the technology-heavy Nasdaq Composite (COMP) slipped by 0.1%.
The Role of Consumers and Recovery Potential
According to Baird, consumers played a significant role in the unexpectedly strong advance of the fourth quarter, while business investment, government spending, and net exports also made meaningful contributions. Although the housing and manufacturing sectors have shown weakness, the service sector has remained strong, and the labor market has proven resilient, with historically low unemployment rates.
Gordon suggests that if housing and manufacturing recover this year, previously lagging areas of the stock market, such as small-cap equities and cyclical stocks, may benefit. Notably, small-cap stocks in the US have declined this year, with the Russell 2000 index dropping 2.8% as of Thursday afternoon trading. This is in contrast to the S&P 500, which has experienced over 2% growth this year, thanks to a few heavily weighted Big Tech stocks.
The Importance of Revenue Guidance
Gordon stresses that during the earnings season, investors should pay close attention to company revenue guidance, as it will be key to determining market performance moving forward.