Bad news is good news, unless it’s too bad

• Hopes are high for U.S. Federal Reserve rate cuts before the election, with gross domestic product dropping to 1.6% providing an opportunity for easing monetary policies.
• A significant decline in consumer spending is the primary reason behind the economic slowdow­­­n.
• Many companies exceeded their earnings expectations, with a few notable exceptions.

Many people on Wall Street and in the White House are still hopeful that the U.S. Federal Reserve finally gives in and starts cutting rates as soon as possible; before the election, at least. Therefore, a weak gross domestic product (GDP) number was not automatically seen as a bad thing; it could even be considered a bad-news-is-good-news situation for a lot of people. The little problem is that too much of a good thing is not that great. The Bureau of Economic Analysis reported a significant drop in U.S. GDP for the first quarter. GDP fell to 1.6%, a sharp decrease from the previous quarter's 3.4%, which marked the lowest rate since the second quarter of 2022 (when the U.S. briefly slipped into a possible technical recession, which the National Bureau of Economic Research did not officially acknowledge).

This deceleration from the last quarter reflects slower growth in consumer spending, exports, and state and local government expenditures, along with reduced federal government spending. However, these were somewhat balanced by a boost in housing investments, and imports also saw an increase. Delving deeper, the primary drag on the economy appears to be the significant slowdown in consumer spending, which rose by only 2.5%, down from 3.3% in the previous quarter and below the expected 3%. Looking at the broader picture, consumer spending has fallen short of expectations in six out of the last 10 reports. Altogether, personal consumption contributed 1.68% to the overall GDP figure, a notable decrease from 2.2% in the previous quarter. While a drastic reduction in growth might seem like the "bad news is good news" that some investors were secretly hoping for (in order to see treasury yields fall), it becomes less like good news if accompanied by rising inflation. The markets responded negatively to this news, although from our point view, it could have been worse.

The week began on a good note, with a three-day market recovery. But it came to a halt on Wednesday evening after Meta's stock plummeted, dropping as much as 11% in one day. Despite reporting strong numbers and surpassing some key performance metrics, the company's lower-than-expected revenue forecast and increased capital expenditure projections disappointed investors. Meanwhile, Tesla reported quite dismal results, missing on revenue and more. But Elon Musk worked his magic once again, and the announcement of a possible new, more affordable car model sent Tesla's shares up by more than 10%. Such are the whims of Wall Street. As it stands, we're awaiting further earnings reports from other major tech companies. Overall, however, this earnings season has shown strength, with companies mostly exceeding expectations.

Listen to this week’s podcast for further insights.