- May 3, 2022
-- Inflation worries took the back seat last week, as the focus shifted to corporate earnings and the deteriorating outlook for global growth. European activity continues to be threatened by the ongoing war in Ukraine, pandemic lockdowns in China are weighing on the country's growth, and the U.S. economic momentum is slowing. Because of these challenges, stocks revisited the lows of this year's trading range, with the S&P 500 now down about 10% and the Nasdaq 20% from their Jan. 3 highs1
We think that investors should continue to expect a bumpy ride for the rest of 2022. However, we don't think equity market declines have to get more severe from here as our base case remains that this year's pullback will prove to be a non-recessionary correction instead of a bear market. The speed bumps that stocks will likely face in the quarters ahead are slowing growth and tighter monetary policy, but resilient demand, healthy consumer and business financial positions, and rising earnings can act as shock absorbers. Last week's economic and earnings data reflect not only the upcoming headwinds, but also the supporting factors that can help keep the expansion on track.First-quarter GDP contraction masks underlying strength in demand
The initial estimate for first-quarter economic growth showed an unexpected contraction, with U.S. real GDP (inflation-adjusted)
declining 1.4%, down from a +6.9% growth in the previous quarter1
. This sharp deceleration was due to a drag from exports, a decline in inventory spending following a sizable increase in the prior quarter, and to a lesser extent a pullback in government spending. But consumer spending, which accounts for nearly 70% of the U.S. economy, continued to grow at a solid pace1
. The key highlights from last week's release, in our view, are the following:
Source: 1. FactSet
- Personal consumption accelerated slightly to 2.7% from 2.5% prior, driven by spending on services. For perspective, consumer spending grew at an average pace of 2.3% during the past decade1.
- As the omicron virus variant subsided, consumers rotated away from spending on goods and toward services, which is a trend that we think has some staying power as the pandemic effects continue to fade.
- Business investment increased 9.2%, the most in a year1. This momentum in capital-spending plans might persist, as companies are accelerating their pace of equipment investments amid ongoing labor shortages.
- The combination of international weakness and solid domestic demand drove a surge in imports but a drop in exports. This dynamic could continue to be a drag on U.S. growth until the geopolitical crisis improves and/or the dollar strength reverses.