Earnings have been trumping any negative economic news to lift the stock market higher for most of this year, but can the stock market rally continue given rising inflation and slowing growth?
Even after the government reported a sharp drop in economic growth for the third quarter (a 2% annualized rate) compared with the first half (over 6%), the U.S. stock market continued to advance.
By mid-afternoon Thursday, the S&P 500 was trading at 4,588, up 36 points from Wednesday’s close.
The jury is still out on how long rising inflation will persist, but a growing number of strategists and others including JPMorgan CEO Jamie Dimon are now convinced that the jump in prices is not transitory, as the Federal Reserve has insisted.
The consumer price index (CPI) rose 5.4% over the 12 months ended Sept. 30. The Personal Consumption Expenditures excluding food and energy, which is the Fed’s favorite inflation indicator, has gained 3.6% over the same period of time. Both key indicators are trending well above the Fed’s 2% target.
While inflation continues to rise, economic growth is slowing from the 6%-plus levels in the first two quarters of this year. Third-quarter GDP grew only 2%, a shift the Bureau of Economic Analysis attributed to the ”continued economic impact of the COVID-19 pandemic.”
The BEA was referring to the resurgence of cases in the third quarter due to the more contagious delta variant but noted that “the full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the third quarter because the impacts are generally embedded in source data and cannot be separately identified.”
See the gallery to find out what a number of market strategists are predicting for the stock market this year and next.