The stock market kept its rally going Thursday, even after the economy shrank for a second quarter in a row. In this case, bad news was good news for stocks.
That’s nothing new for the market of late. All three indexes soared Wednesday, with the Nasdaq seeing its best gain since April 2020. The S&P 500, meanwhile, has gained about 11% since hitting its intraday low for the year in mid-June.
The gains have been driven by the narrative that the Federal Reserve will soon slow down the pace of interest rate hikes, which are meant to cool high inflation by reducing economic demand. Wednesday, the Fed lifted the benchmark lending rate by three-quarters of a percentage point, but also said that it could soon slow down the pace of the hikes if signs that the rate of inflation will slow down emerge.
Already, real gross domestic product growth was negative 0.9% for the second quarter, marking its second consecutive quarter of negative growth.
The threat of recession, at this point, isn’t much of a problem for the stock market. First off, the S&P 500 had already dropped 24% from its early January all-time high to its low of the year hit in mid-June, reflecting a hit to demand.
“The overall decline should not be too surprising as the possibility of a drop in GDP had been well-telegraphed before the release,” wrote Citi economist Andrew Hollenhorst.
Now, the weaker demand is precisely the reason the Fed is apparently starting to watch for when it needs to slow down its rate-hiking campaign.
“The market is anticipating the Fed being done [hiking rates] earlier given how quickly things are slowing,” said Marc Pfeffer, managing director at S64 Capital Innovation.
Additionally, many companies are benefitting from the inflation that is partly causing the decline in real GDP, which is total output adjusted for inflation. To be sure, inflation has reduced the number of items that consumers buy, but for now, sales are still growing. Chipotle Mexican Grill (ticker: CMG), for example, said on its recent earnings call that it is continuing to lift prices to grow sales. The stock surged after earnings.
Earnings season more broadly has been largely strong. With almost half of the S&P 500’s market capitalization having reported earnings, the aggregate earnings per share result has beaten the expectation by almost 4%, according to Credit Suisse, even as some companies warn about slowing consumer spending.
“Earnings remain in focus, as Apple and Amazon are next up after the close, as the market will look to digest more data on the consumer and the ad space,” wrote Stefanos Bazinas, execution strategist at New York Stock Exchange.
The one negative impacting the stock market Thursday is the possibility of higher corporate taxes from Washington. The Senate has agreed on a spending bill that would include a 15% minimum on corporate taxes. It would also enhance tax enforcement at the Internal Revenue Service.
Here are some stocks on the move Thursday:
Meta Platforms (META) slumped 5.2%, after the social-media group’s disappointing earnings and a third-quarter outlook that was significantly below Wall Street’s estimates. The company expects revenue between $26 billion and $28.5 billion in the third quarter, while analysts’ consensus forecast was $30.7 billion in sales. Meta continues to grapple with a tough advertising environment and increasing competition from TikTok.
Qualcomm (QCOM) stock dropped 4.5% after the company reported a profit of $2.96 a share, bearing estimates of $2.87, on sales of $10.93 billion, above expectations for $10.88 billion. Guidance was disappointing.