US markets are touching record highs and inflation is slowing, but that hasn’t stopped some market watchers from expressing concerns the US economy could be showing signs of weakness.
“There is a growing body of evidence that the US economic data is turning lower and could point towards a potential recession later this year,” Kathleen Brooks, research director at XTB wrote earlier this week.
“It also puts the spotlight firmly on the September Fed meeting, when the market seems to think that the Fed could cut rates.”
Brooks pointed to June’s labor market data showing the ADP private sector payrolls report was 150,000 versus the 165,000 expected.
That is “rarely a good predictor of non-farm payrolls,” Brooks noted. “Instead we believe that you can get more information from the latest initial jobless claims and continuing claims data.”
Even more worrying, initial jobless claims rose to 238,000 last week, with continuing claims sharply increasing to 1.858 million, the highest since 2021. This suggests that laid-off workers may struggle to find new jobs, potentially indicating a rising unemployment rate, according to Brooks.
Additionally, broader economic data has been showing signs of slowing growth, which could impact the US dollar, Treasury yields, and the stock market.
“There is no doubt that the main US blue chip indices are being driven by a handful of stocks,” wrote Brooks. “Less than 200 stocks on the S&P 500 posted a gain in the past month, in a healthy market you would want at least two-thirds of members to register a gain.”
Year-to-date, 295 members of the S&P 500 have posted gains, but only 119 of them have matched the index's overall 15% gain.
Investors are likely to continue favoring strong, growth-oriented companies, particularly those in tech and AI sectors, in this uncertain economic environment.
“If the economy is slowing, then it is no wonder that investors are gravitating towards companies with strong growth potential and bullet proof balance sheets,” wrote Brooks.
“Thus, if US economic data continues to slow, we do not think that market breadth in the US stock market will widen, and we expect the same stocks to continue to power the main US blue chip index for the medium term. A slowing economy also puts pressure on the Fed to cut rates before they break something.”