Checking in on the US Consumer

May 7, 2024

By Ellen Hazen, CFA®, Chief Market Strategist

April Takeaways:

  • Decent corporate earnings but muted stock price response. Based on the market’s disappointing response to strong first-quarter earnings reports, we conclude that investors were expecting even stronger results. Revenue growth and earnings growth for the first quarter of 2024 averaged between 4% and 5%, a pace that we expect to accelerate throughout 2024 for a full-year average of 8%. Despite an average beat of 9% (a three-year high), the average stock price response of companies beating earnings was at a three-year low of -0.5%. Simply put, the sharp rally in the first part of the year already anticipated significant earnings beats. Thus, during April, equity indices declined (see below).
  • Small company earnings are significantly underperforming large company earnings. Average Q1 2024 earnings for the S&P Small Cap 600 Index thus far (with only 60% reporting) are down over 16% year-over-year. This is the key reason that we expect small-cap stocks to continue to underperform large-cap stocks. We do not expect this earnings underperformance to be limited to the first quarter. Earnings estimates growth for the full year 2024 are significantly lower for small cap stocks (+2.8%) than for large cap stocks (+9.9%).
  • Inflation stabilized but is no longer declining. March Consumer Price Index (CPI) of 3.5% year over year was an acceleration from February’s 3.2%. Core CPI (excluding food and energy) remained flat with the prior month at 3.8%. Personal Consumer Expenditure similarly stabilized, at 2.8%, flat with the prior month.
  • Labor market slowing. After a long string of much higher-than-expected jobs reports, new jobs created in April were light of expectations. New jobs created were 175,000 vs. expectations of 245,000. Note that with population growth of two million people per year, and assumed flat labor force participation, new jobs needed to keep employment flat are about 170,000.
  • The Fed kept short-term interest rates flat at 5.25%-5.50%, while announcing a slowing of the pace of shrinking its balance sheet holdings. This was widely anticipated after the no-longer-declining inflation news.
  • Equity markets narrowed again. After having broadened in March (with small and mid-sized companies outperforming large-cap companies), equity markets returned to a narrow market in April. The S&P 500 Index declined by 4.1%, while the S&P SmallCap 600 Index and the S&P MidCap 400 Index did worse, declining by 5.6% and 6.0% respectively.
  • The Magnificent Seven (Mag7) performance divergence continued. Year-to-date through April 30, the best performer of the Mag7 (Nvidia) is up 74%, while the worst performer (Tesla) has declined by 26%. On average, the Mag7 continue to handily outperform the overall S&P 500, with the average Mag7 stock appreciating by 13.4% through April 30, vs. +6.0% for the S&P 500.
  • Rates sharply increased. The 10-year Treasury yield increased from 4.20% at the end of March to 4.68% by the end of April; the 2-year Treasury yield similarly increased from 4.62% to 5.04% during the month. This was primarily due to higher-than-expected inflation readings, leading investors to believe that the Fed will hold interest rates higher for longer.

What We Are Watching In May:

  • Nonfarm payrolls for May will be reported on June 7. Markets will be attuned to whether the slowdown in new jobs visible in April continues in May.
  • Inflation. CPI will be reported on May 15, while the Personal Consumer Expenditure Index will be reported on May 31. We expect inflation to remain stable, albeit above the Fed’s 2% target.
  • No Fed meeting until June. We will however be assessing Fed speeches and anticipate possible language clarifying possible rate-cut timing. We could see an interest rate cut in Q3, or if stronger economic data persists, not until Q4.

Will the equity market broaden beyond the large-cap space? The narrowness of the equity market in 2023 and early 2024 has been well-discussed, with just a handful of stocks contributing the majority of the index-level returns. Will the short-lived increased breadth observed in March return in 2024, or will the largest stocks continue to dominate investment returns?

Consumer indicators have slowed but remain healthy. The US is still late-cycle.


Checking in on the US Consumer

Because of its outsized importance to the economy – consumer spending is two-thirds of Gross Domestic Product – we closely watch the US consumer. Some of the measures on which we focus include real wage growth, retail sales, credit card volume, and consumer sentiment.

Real wages have largely kept up with inflation over the past several years. Although there are times when one measure outpaces the other, in aggregate, they have been roughly comparable. The chart below shows both the CPI (blue) and Average Hourly Earnings (green) in nominal terms over the past ten years. You can see that during some periods, wages have outpaced inflation, while during other periods, inflation has outpaced wages. In general, though, they have trended together. By this measure, wages lagged during the very high inflation months of 2022, but wages have been above inflation for the past year or so. This supports our confidence that the consumer remains fairly healthy and can sustain economic growth throughout 2024.

The growth rate of retail sales has been flat for the past year or so, after having steadily declined from the 2021 Covid-era peak. The most recent reading of 2.4% is in the middle of the 1.4% to 3.25% range over the past year. We view this as evidence that while consumers are not struggling, neither are they accelerating spending.

Similar to retail sales, credit card volume growth is in the middle of its three-year range. Current credit card volume growth is 4.7%, while the range over the past few years has been between 1.5% and 9%. Again, consumers are not accelerating, but neither are they retrenching.

There are two measures of consumer sentiment that are widely published: the University of Michigan Consumer Sentiment Survey, and The Conference Board Consumer Survey. The first tends to be more sensitive to inflation, while the second tends to be more sensitive to jobs. As expected, over the past two years, the University of Michigan survey has been more negatively skewed, as consumers are keenly aware of inflation. By contrast, the Conference Board survey has been fairly stable, reflecting the continued strong jobs market.

In summary, consumer indicators have slowed from fairly brisk levels, but remain healthy. As a consequence, we believe that the US will remain in an economic growth environment for the next several quarters. In other words, the economy is still mid-to-late-cycle. In a mid-to-late-cycle economy, areas that perform best are risk assets, such as equites and high-yield bonds. Within equities, outperforming sectors generally include Information Technology, Consumer Discretionary, and Industrials. 


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