This week’s main focus for the stock market will be Wednesday’s inflation report, which comes amid a busy period that also includes earnings from major retailers and a retail sales update.
Wall Street is growing increasingly anxious about the U.S. economy, with concerns that American households are feeling the strain. If this is reflected in this week’s economic and earnings reports, it could jeopardize the stock market’s recovery following its worst day in two years.
On Friday, U.S. stocks ended a volatile week, affected by the unwinding of a yen-fueled carry trade and fears of a weakening U.S. economy, which shook global financial markets. Despite the turbulence, all major indexes closed just short of erasing their weekly losses.
The S&P 500 declined by less than 0.1% for the week, the Nasdaq Composite slipped 0.2%, and the Dow Jones Industrial Average fell 0.6%, according to FactSet data.
Attention now turns to a new batch of U.S. economic indicators due this week, including July’s Consumer Price Index (CPI), a retail sales update, and earnings reports from some of the country’s largest retailers. Investors are eager to see whether American households are under increased pressure from persistent inflation and rising interest rates.
“Financial markets have temporarily stabilized after concerns about a hard landing led to a brief moment of panic,” said Michael Gapen, an economist at BofA Global Research. “The data ahead will reveal whether the economy is slowing gradually or sharply.”
As always, the upcoming CPI report could significantly impact both the markets and the Federal Reserve. However, this time, investors are particularly sensitive to any signs of an economic slowdown or insufficient easing of inflation, which could cause stocks to tumble.
Economists surveyed by the Wall Street Journal anticipate headline inflation to hold steady at 3% year-over-year in July, while core CPI, which excludes volatile food and energy prices, is expected to ease slightly to 3.2% from June’s 3.3%.
Brian Weinstein, head of global markets at Morgan Stanley Investment Management, noted that inflation is likely to stay above the Fed’s 2% target for some time, citing persistent price increases in areas like car and home insurance, especially in regions with population booms. “These costs continue to drain consumers’ budgets every month,” Weinstein said.
Uncertainties around geopolitical tensions and the economic policies of the 2024 U.S. presidential candidates are also factors keeping inflation elevated, according to Weinstein.
Consumers are feeling the pinch, and businesses are noticing.
The Fed’s strategy to control inflation while sustaining economic growth worked well in the year’s first half. However, recent months have shown early signs of a consumer spending slowdown, as highlighted by several consumer-focused companies.
Last month, luxury-goods giant LVMH reported a decline in second-quarter sales from its Asia (excluding Japan) business, which represented 30% of its first-half 2024 revenue. McDonald’s Corp. also reported that inflationary pressures are causing consumers, especially lower-income households, to be more selective with their spending. Similarly, Airbnb Inc. expects a slowdown in leisure travel as consumers delay booking stays amid economic uncertainty.
Years of persistent inflation and the Fed’s tightening monetary policy have squeezed American households, who are now exhausting the savings they accumulated during the COVID-19 pandemic. As a result, many consumers are becoming more discerning in their purchases and spending habits.
“Most consumer-facing companies, like Starbucks and McDonald’s, have issued profit warnings, signaling a challenging environment for consumers,” said Brad Conger, chief investment officer at Hirtle Callaghan & Co. “This reflects the depletion of consumers’ pandemic savings and their concerns about job security and future income.”
This makes the upcoming earnings reports from major U.S. retailers another critical event for the stock market this week.
Walmart Inc. and Home Depot Inc. are among the companies set to release earnings on Tuesday and Thursday, respectively. Investors are eager to see more evidence of the state of consumers from companies selling essential household goods.
Conger warned that the slowdown in consumer spending could spread to other areas of the consumer sector. “People are cutting back on all kinds of spending, which means businesses will likely reduce hiring plans, affecting employment and incomes,” he said.
Despite these concerns, recent economic data has sent mixed signals about growth. Last week, the service sector rebounded in July, countering the growing belief that the U.S. might be edging closer to a recession. Additionally, the number of Americans filing for unemployment benefits fell to 233,000 last week, a sign that the labor market may still be strong despite a soft July jobs report.
These reports helped stocks recover some of their losses from earlier in the week.
“There’s a sense of panic and fragility in the stock market right now,” Conger told MarketWatch. “Small positive surprises in economic data won’t significantly change market sentiment. If more positive data points emerge in the coming weeks, each will have a smaller impact on the market.”
Weinstein predicted more market volatility, which could limit stock gains, but added, “I don’t think this necessarily means a hard landing or guarantees a recession.”
