Inside Markets — From Goldilocks to Soft Landing

The prevailing narrative has shifted from Goldilocks (resilient growth, lower inflation, rate cuts) to ‘soft landing’ (slow growth, lower inflation, rate cuts) over the last three weeks. Unfortunately, the growth outlook is deteriorating faster than inflation can decelerate, which drives an emerging and possibly premature stagflation theme. Disappointing growth data started back in mid-April and caught our attention when the US Economic Surprise Index (ESI) crossed below its 100-day moving average on April 23 and then into negative territory on May 2.

The mood seems pretty gloomy despite the SPX being only ~1.9% below its all time high. In our opinion, the downbeat mood reflects the steady loss of market breadth as several industries lose pricing power (airlines, autos/auto dealers/consumer staples) and others (software) cut FY guidance on April-end earnings calls. The loss of market breadth is a cause for concern, but we stick with our initial ~4% SPX pullback scenario and price objective in the 5060-5140 range. A break below 5060 would unwind the April-early May rebound with levels below ~5000 would shift our attention to the correction scenario that implies peak-to-trough declines in the 10-15% range. We don’t see that happening unless there’s a material change in macro fundamental conditions.

The list of important near-term macro catalysts include: 1) ISM manufacturing on June 3; 2) ISM services and May Jobs Report on June 7; and 3) retail sales on June 18.