Stagflation Concerns Grow as U.S. GDP Slips and Inflation Holds Firm. [Learn Premium Weekly Review]

🌐U.S. Q1 GDP Unexpectedly Falters: Are Hopes for a Soft Landing Dashed?

This Thursday, the U.S. released its preliminary Q1 GDP growth, marking a near two-year low at a 1.6% QoQ increase—less than half of Q4's rate, and significantly slower than the anticipated 2.5%. This sharp slowdown has dashed hopes for a soft economic landing. GDP represents a comprehensive measure of economic activity, with initial, revised, and final quarterly U.S. GDP figures released over different months. The initial figure, largely based on estimates rather than actuals, plays a crucial role in influencing market sentiment. This unexpected deceleration underscores the economy's struggle under high-interest rates.

In detail, PCE, a primary engine of economic growth, increased by 2.5% in Q1 and was also below expectations. Alongside the GDP report, the Federal Reserve's favored inflation gauge, the core PCE price index, rose unexpectedly by 3.7% in Q1—almost double the rate of the previous quarter.

The data reveals unexpectedly weak economic growth and stubbornly high core inflation, while the labor market remains strong—intensifying concerns of stagflation and making it more likely for the Federal Reserve to delay rate cuts. Following the GDP release, swap contract pricing reflected investors expecting about 33 basis points in Fed rate cuts for the year, suggesting only one 25 basis point cut, far below the more than six cuts anticipated at the start of the year.

Another narrative suggests that between combating inflation and supporting the economy, the Federal Reserve might opt for the latter, potentially easing the stance on rate cuts.

🔥Tech Earnings Season: Stocks Dip on Surpassing Forecasts, Rise on Missing Them – What Gives?

This week, U.S. tech giants like $Tesla(TSLA.US)$, $Meta Platforms(META.US)$, $Alphabet-C(GOOG.US)$, and $Microsoft(MSFT.US)$ released their Q1 earnings reports. As we previously discussed, following dampened rate cut expectations, the new round of earnings from AI-benefiting tech companies might be the catalyst for continued growth in U.S. stocks. However, a clear divergence is evident among the companies that have reported so far.

Particularly after Meta's earnings report on Wednesday, a popular chart on social media X showed Tesla's stock up 10% despite missing earnings expectations, while Meta beat expectations but saw its stock price fall by 10%. This topic sparked lively discussions in our Premium Group.

The simple logic of "stocks rise on good earnings and fall on bad earnings" doesn't seem to apply here.

Earnings reports do more than just recap a company's quarterly profits, growth rates, and performance; they also assess future earnings potential and are influenced by market expectations.

A crucial point is that stock prices likely already reflect past performance. Tesla's price drop earlier in the year, for example, was because the market had already adjusted for expected sales, deliveries, and company announcements. Thus, Tesla's future outlook became crucially important. In their earnings call, Musk explicitly stated his commitment to affordable models and an early exit from robot cabs.

As for Meta, its share price had been among the best performers in the Mag7, second only to Nvidia, prior to the Q1 report. The market didn't expect a poor performance and even anticipated rapid growth next quarter. So when the company's future outlook fell short of market expectations, its stock price adjusted accordingly.

For growth-oriented companies, future outlooks are especially critical since the stock market trades on expectations. Any performance falling short or showing decelerated growth is swiftly reflected in stock prices.

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