The U.S. economy and markets are in good shape at the halfway point of 2024, and likely headed for a soft landing from earlier projections of potential recession. That was the message shared recently by PNC Chief Economist Gus Faucher and PNC Asset Management Group Chief Investment Officer Amanda Agati.
The U.S. labor market is strong, with historically low unemployment and continued, though slower, wage growth through the first half of the year. The positive jobs data is growing household wealth overall and driving continued consumer spending, according to PNC’s 2024 Mid-Year Investment and Economic Outlook.
“Consumer spending makes up about two-thirds of the U.S. economy,” Faucher said. “So as long as consumers continue to do well, the U.S. economy should continue to expand in the near term.”
Boosting that expansion is the likelihood of upcoming Federal Reserve (Fed) interest rate cuts, which Faucher said he expects to be announced during meetings of the Federal Open Markets Committee in November and December of 2024. The cuts will be the result of the continued slowing of inflation, which peaked at more than 9% in mid-2022, and has been slowly dropping since.
Faucher noted that weaker wage growth in the months ahead will also work to slow inflation, dropping demand and slowing price growth for U.S. businesses. Overall, Faucher said growth in the economy will be slower in the remainder of 2024 than in 2023, and the unemployment rate will rise slightly — but likely will remain within the Fed’s maximum employment mandate.
The updated forecast is brighter than previous projections, which broached the possibility of a U.S. recession in 2024. Faucher noted that the U.S. Treasury yield curve — which reflects the market’s expectations for interest rates — has remained inverted for the longest period in history. That’s often a sign of an economy in or headed toward a recession. And while a recession now appears less likely, the economy is still susceptible to “an external shock,” such as international conflict or other geopolitical issues. Faucher put the odds of the economy slipping into a near-term recession at 1 in 3. He allowed that recession risk is still elevated, but it is not PNC’s baseline forecast given the currently strong performance of the U.S. economy.
“Right now, things look good,” Faucher said. “We should see slowing inflation through the rest of 2024 and into 2025. And we should see continued expansion — perhaps a little bit slower than what we’ve experienced but still solid — with a continued strong labor market.”
An End to the Earnings Recession?
Agati followed by saying that Faucher’s forecast of a soft landing for the economy needed to come true to answer investors’ questions about what the market will do in the year ahead. The market has been on a “torrid rally,” with the S&P 500® hitting 31 all-time highs this year. Most of that, Agati said, has been on the back of the “Magnificent Seven” basket of technology stocks. Excluding those seven stocks, investors have endured six straight quarters of negative earnings growth, causing investors to pay a premium where growth can still be found.
Agati cited inflation and high interest rates as putting pressure on Corporate America, which has hampered growth and led to an “earnings recession.” She noted that more than 180 large-cap stocks have experienced negative returns year over year.
Still, her expectation is for positive news on the horizon. Agati posited that the second quarter 2024 earnings season should be the inflection point for the earnings recession among the 493 other S&P 500 companies not included in the Magnificent Seven. And growth in sectors outside of technology should pick up but hinges on the forecast for continued strong consumer spending.
“We think a really important fundamental support beam for markets and the economy more broadly is liquidity remaining very free and accessible, even in the face of the Fed still pausing from a policy action perspective,” Agati said.
And though the Fed has yet to lower interest rates, the projection for lower rates by the end of 2024, coupled with positive economic data, has kept volatility in the bond markets relatively calm. Agati noted that though the yield curve has been inverted for an extended period, the 2- to 10-year portion of the curve has become less inverted in anticipation of a future rate cut — portending a brighter outlook in the bond markets.
For stocks, Agati said the consensus earnings growth estimate for all of 2024 is 11%, with 14% growth in 2025. She believes for earnings growth to prove sustainable, it needs to broaden to sectors outside of those represented by the Magnificent Seven, such as the Health Care, Financials and Industrials sectors. That growth, overall, is not expected to come in a straight line.
“Things will get a little bit choppier. The market’s advancement may be a bit like ‘two steps forward and one step back,’” Agati said. “But as we start to get clarity on some of these unanswered questions and as we move past the election, we expect a pretty strong finish for the markets in 2024.”
