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What this video’s about:

In a recent discussion on The Market Share, Erik Clapsaddle, Senior Fixed Income Portfolio Manager, and Rob Romano, Head of Equity Research, examined key economic trends. Their conversation covered the current state of consumer spending, the Federal Reserve’s role in the economy, and the outlook for corporate earnings.

Consumer Spending: Signs of Slowing

Consumer spending is a major driver of the U.S. economy, but recent data suggests that this engine may be losing steam. According to Rob Romano, “We’re starting to see evidence that the consumer is slowing down.” Key indicators such as consumer confidence are slipping, and the national savings rate has dipped below 3%.

Spending patterns tell a similar story. After a surge in goods purchases during the pandemic, demand has returned to long-term averages. Higher interest rates are making big-ticket items like appliances and vehicles more expensive, which has softened demand. Meanwhile, service spending, which rebounded sharply once the economy reopened, is also beginning to plateau. Hotel and airline bookings are down, and Deloitte forecasts holiday spending will grow at its slowest rate since 2018.

Federal Reserve’s Role in Interest Rates and Inflation

The Federal Reserve’s recent 50 basis point rate cut—from 5.5% to 5%—was designed to stimulate the economy, but its impact might be limited given the broader context. Romano and Clapsaddle discussed how the Fed’s actions, including its use of quantitative easing, have shaped the economic landscape in recent years.

The Fed’s bond-buying spree during the pandemic pushed its balance sheet from $4 trillion to a peak of $9 trillion, making borrowing easier and boosting asset prices. While the balance sheet has since declined to $7.1 trillion, these historically high levels, combined with fiscal stimulus, have fueled the inflationary pressures we’ve seen in the last few years. Lower rates have supported higher asset prices, particularly in the housing market, but inflation remains a concern for both consumers and investors.

Corporate Earnings: Strong but Cautious Outlook

Despite the broader economic headwinds, corporate earnings have remained resilient. Second-quarter earnings were up 10%, exceeding expectations of 8.9%. Revenue growth, particularly in the technology sector, has been robust, driven by demand for semiconductors and software. However, more rate-sensitive industries like housing and autos are facing challenges. Both Home Depot and Lowe’s have reported negative same-store sales for the year, while auto sales remain below their 2019 peak.

Looking ahead, analysts project a 10% earnings growth for 2024, with an even more optimistic 14% increase forecasted for 2025. Romano expressed caution, noting that these projections might be overly optimistic given the slowing economy. However, he also emphasized the strength of corporate America, particularly its ability to maintain profit margins through cost-cutting and operational efficiencies.

Conclusion

While consumer spending is softening and inflation remains a concern, corporate earnings continue to offer a silver lining. With the Federal Reserve’s policies still influencing market conditions, the path forward will depend on how both consumers and companies adapt to these economic challenges.

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