Why this economic slowdown is bullish for stocks

Booming earnings paired with weaker GDP is historically the best backdrop for investors

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The tech-heavy Nasdaq eclipsed 17,000 for the first time ever on Tuesday, largely thanks to Nvidia.

Meanwhile, the S&P 500 barely moved, the Dow fell more than 200 points, and consumer confidence inched higher for the first time in three months.

Multiple Fed speakers are on deck these next few days. If I were a betting man I’d be looking for each one to say some version of “interest rates ain’t budging.”

The perfect storm for stocks is here

Just because the US economy looks poised for a sluggish summer doesn’t mean investors should be worried.

So far this year, the S&P 500 is up 11.8% and earnings have proved robust.

Those gains could run higher in the months ahead even as the Federal Reserve’s high interest rates pressure economic growth and employment, according to Bank of America strategists.

“Historically, a slowing GDP + accelerating EPS backdrop has been the best macro environment for stocks,” the strategists wrote in a Tuesday note. 

While counterintuitive, it makes sense. Slower economic growth keeps inflation in check and opens the door to lower interest rates, which gives companies a stable environment to grow profits and run a business. 

The latest US GDP data is due Thursday, and Wall Street expects the government to revise its first-quarter growth figure to 1.2%, down from the prior estimate of 1.6%.

That follows several soft labor market reports which showed declining job openings and hiring numbers.

Again, in this specific scenario the expected economic slowdown doesn’t imply a pullback for the stock market.

Earnings have simply come in too strong, with first-quarter EPS beating consensus forecasts by 3% and rising 7% compared to a year ago. 

At the same time, analysts across the board have raised their outlooks for the remainder of 2024. 

According to Bank of America data going back to 1950, when EPS growth accelerates while GDP is slowing down, the average quarterly S&P 500 return is 3.6%. 

That’s better than the 2.0% seen when both earnings and GDP accelerate. 

The divergence between equities and macro data can be explained in part by how manufacturing-heavy the S&P 500 is compared to the broader economy. 

Goods and manufacturing, BofA strategists said, represent half of earnings for the benchmark stock index versus less than 20% for the economy, as the chart below shows.

Source: Bank of America Global Research

“An improving manufacturing cycle despite slowing services is a main driver of the divergence, in our view,” the strategists said.

“The spread between the two has been highly correlated to the spread between earnings and GDP historically.”

In the second half of the year, a rebound in manufacturing could boost demand growth, which has so far been missing from an otherwise upbeat earnings season. 

That in turn should generate better operating leverage and margins moving forward, regardless of whether economic growth peters out. 

“With a manufacturing recovery underway,” the strategists said, “improving fundamentals should continue to support the market.”

What is your stock market outlook for the next three months? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Tuesday 8:30 p.m. ET


  • Consumer Confidence is ticking higher. The Conference Board’s metric beat expectations to climb for the first time in three months. Still, the results remain generally negative. Recession fears loom, as do concerns on inflation, debt, and business conditions. (Yahoo Finance)

  • Nvidia stock surged (again). The chip-maker darling continued its multi-day tear with a 7% gain. Tuesday’s rally followed reports that Elon Musk intends to deploy Nvidia technology for his artificial intelligence startup, xAI. (Bloomberg)

  • Wall Street’s favorite recession indicator isn’t working. The inverted yield curve has long been a harbinger of a downturn. But even after flashing for more than 400 days, the economy has yet to fully sputter. That means the yield curve’s status as a warning signal is now in question. (WSJ)


  • Home prices hit a new record high in March (MarketWatch)

  • Shares of healthcare technology company Semler Scientific surged more than 32% after it invested $40 million in bitcoin (CNBC)

  • A judge sentenced a former FTX executive to 7 years in prison for illegal political contributions (WSJ)

  • Hess shareholders approved a $53 billion merger with Chevron (Reuters)

  • GameStop rallied 25% after the company capitalized on the meme-stock boom (Barron’s)

  • US states and local governments have shrugged off high interest rates to fuel the municipal bond market to its busiest year in a decade (Bloomberg)

  • The newest version of ChatGPT is reportedly better than humans at financial forecasting (Business Insider)

Last thing:

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