The Stock Market Looks Past NVIDIA After a Solid US Economic Report

Stocks gained while bonds fell as new data highlighted the resilience of the U.S. economy despite the Federal Reserve's elevated interest rates. However, Nvidia Corp. saw its shares drop by 2% after its outlook failed to meet investor expectations.

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Despite the high anticipation surrounding Nvidia's results, the decline in its shares was not enough to hinder the broader equity market's upward movement. The S&P 500 continued its August climb, supported by strong economic data, while the Nasdaq 100 rose by 1%. These gains took on added significance ahead of the release of the Fed’s preferred inflation gauge. The upcoming data is expected to reveal that the core personal consumption expenditures (PCE) price index is now just slightly above the Fed’s 2% target, a key measure that could influence the central bank's future decisions.

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In the latest economic update, the U.S. gross domestic product (GDP) grew at a 3% annualized rate for the April-June period, a slight improvement from the previously estimated 2.8%. This growth was largely driven by personal spending, which saw an increase of 2.9%, up from an earlier estimate of 2.3%. Additionally, a separate government report indicated that initial claims for unemployment benefits remained relatively stable, coming in at 231,000.

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Chris Larkin from E*Trade at Morgan Stanley interpreted the data as a sign of steady progress for the U.S. economy. "The message of this morning’s data is ‘steady as she goes,’" Larkin commented, noting that the slightly lower jobless claims and the upward revision in GDP suggest that the economy is not in immediate danger of a downturn. He added that in the current market environment, this kind of stable economic news is viewed positively. Larkin also mentioned that there was nothing in the data to prompt the Federal Reserve to reconsider its plan to cut rates next month.

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Bret Kenwell of eToro echoed this sentiment, saying that the data reassured investors about the economy’s stability. "The U.S. economy is more resilient than many realize," Kenwell stated. He believes that the latest economic report should boost investor confidence in the Fed's ability to engineer a soft landing—an economic scenario where growth slows enough to curb inflation without triggering a recession.

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The S&P 500 saw a rise, reaching around 5,630, with Salesforce Inc. leading the charge with a 4.5% increase. This gain came after the company issued a bullish outlook, which seemed to ease investor concerns over potential slowdowns in sales growth. In contrast, Dollar General Inc. experienced a sharp decline, plunging 25% after the discount retailer lowered its sales forecast, reflecting the varied responses among different sectors.

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On the bond market, the yield on 10-year Treasury notes increased by four basis points to 3.87%, ahead of a $44 billion seven-year U.S. Treasury auction. Meanwhile, the U.S. dollar appreciated, although it was still on track for its worst month in 2024.

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Jeff Roach at LPL Financial pointed out that the combination of downward revisions to inflation and upward revisions to consumer spending bolsters the case for a soft landing. He noted that this mix of economic data—solid growth, moderated labor demand, steady layoffs, and easing inflation—provides a strong foundation for the Fed to consider reversing its current course. Jim Baird of Plante Moran Financial Advisors shared a similar view, describing the situation as a potential "Goldilocks scenario," where conditions are just right to quell recession fears and support a soft landing.

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Overall, the recent data paints a picture of a U.S. economy that is holding firm in the face of challenges. The resilience in consumer spending, coupled with moderated labor market conditions and easing inflation pressures, offers hope that the economy can navigate through this period of tightening monetary policy without falling into a recession. Investors, buoyed by these developments, seem increasingly optimistic that the Federal Reserve might successfully guide the economy toward a soft landing, where growth slows enough to keep inflation in check without causing significant economic harm.

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