Thought of the day

The S&P 500 declined 0.5% on Thursday, its sixth fall in seven days, amid a cooling of enthusiasm over the outlook for top tech firms. While the S&P 500 ended 4.7% below its peak on 16 July, the Magnificent 7 basket of leading technology and growth stocks is down 13% from its record high on 10 July. Investors were underwhelmed by the second-quarter results announcement earlier this week from Alphabet—Google's parent—despite the fact that earnings topped expectations.

Next week will be a big one for the tech sector, with results from Apple, Meta, Microsoft, and Amazon. It will also be an important week for the US economy and monetary policy. The monthly US jobs report is released on Friday, a key print for Federal Reserve policymakers as they consider the timing and pace of rate cuts.

The Fed is not expected to change policy at its meeting a few days earlier. But we expect the meeting and upcoming data releases to support our view that monetary easing will start in September as the US continues to head toward a soft economic landing.

Growth should cool further to below trend. The US GDP grew 2.8% annualized year-over-year during the second quarter, above our 2% estimate of the economy’s trend growth rate. This came after stronger-than-expected retail sales and industrial production for June. But our view remains that the economy has entered a period of below-trend growth, with anecdotal evidence in the Fed’s Beige Book suggesting that growth has slowed to a modest pace. The steadily rising unemployment rate is also consistent with below-trend growth. At the same time, we see little evidence of an imminent hard landing.

Broad disinflation is in place. The monthly inflation prints in May and June were lower than in prior months, with the headline consumer price index (CPI) actually turning slightly negative in June. While goods prices have been falling over the past year, the latest data shows broad disinflation, including in services. We are finally seeing the slowdown in rents that we have been anticipating for a long time, and we expect this more moderate pace to persist in the months ahead, helping to bring down the overall inflation rate.

Investors will be looking for further evidence of easing price pressures from the release due later today of the personal consumption expenditure index for June, the Fed's favorite gauge of inflation. More moderate growth in consumer spending should also help to keep inflation on a downward trend, as more businesses are reporting price cuts amid consumer pushbacks

Policy pivot is on the horizon. Recent public comments from top Fed officials, including Fed Chair Jerome Powell, suggest rate cuts are likely to begin in September, in line with our base case. Last week, Fed Governor Christopher Waller said that “we are getting closer to the time when a cut in the policy rate is warranted.” This was echoed by president of the New York Fed President John Williams who said that recent inflation data were “getting us closer to the disinflationary trend that we're looking for.”

So, investors should ensure their portfolios are prepared for a lower-rate environment. This means deploying excess cash into high-quality corporate and government bonds as part of a diversified allocation to fixed income. We also think bond ladders and structured investment strategies with capital preservation features can offer investors some of the certainty provided by cash, but with higher return potential as rates fall.