Inflation relief was noticeable this week, with both the Producer Price Index and Consumer Price Index reinforcing the downward trend in inflation. The real problem for the market was an emerging narrative of a “growth slowdown” and fears about how far it would go. Today’s retail sales report (up 1.0% mom, up 0.4% excluding autos, well above expectations for a 0.3% and 0.1% increase, respectively) and strong Walmart comments on the consumer reinforce that consumer growth may be slowing but is still resilient. Bottom line: The soft landing is very much alive. Where Markets Stand Now The S&P 500 has made a complete round-trip, from around 5,500 just before the jobs report to the close of 5,186 on August 5 and now back to around 5,500. .SPX 1M-mount S&P 500 Index over the past month. The same is true for the CBOE Volatility Index (VIX). Fear has made a complete round-trip over the same period. Fear reached levels not seen since Covid, but then quickly receded, falling from 15 to 60 and back to 15. And all this happened while market sentiment remained largely neutral. One barometer of investor sentiment, the American Association of Individual Investors’ weekly investor survey, is largely neutral: Bulls vs. Bears (AAII weekly survey, ended Aug. 14) Bullish 42.5% (historical average 37.5%) Neutral 28.6% (historical average 31.5%) Bearish 28.9% (historical average 31.0%) Source: AAII During periods of euphoria, bullish readings drop below 50%, so a reading around 40 is well below euphoria. Let’s look at other market indicators: Inflation: Downward trend Interest rates: Rate cuts expected Growth: Slowing, but no recession (Atlanta Fed forecasts 2.9% GDP growth in Q3) Earnings: Holding up The fact that earnings growth estimates are holding up is key. S&P 500 earnings are expected to grow 10% in 2024, with 15% growth forecast for 2025. Those estimates have barely changed in recent months. True, revenue growth hasn’t been that strong, and a big part of the reason earnings are holding up is cost cutting. That and the need for higher revenues are clearly a theme for 2025. Regardless, inflation is easing. Growth is slowing, but a recession is not in sight Rate cuts are coming, and earnings are still holding up. That’s practically the definition of a soft landing. If all that doesn’t impress you, here’s Walmart CFO John David Rainey in a CNBC interview: “In this environment, it’s responsible or wise to be a little cautious on the outlook, but we’re not predicting a recession.”
What retail sales and Walmart sales tell us