Stock and GDP Outlook, for Week Ending 07/04/2025
Slow Glide
Stock prices and the mean expected NGDP growth rate rose sharply last week, as inflation expectations eased a bit, with the VIX falling toward a normal range. There was hence a small real positive shock, likely related to signals that there will not be an ongoing war involving Iran that will disrupt access to Middle Eastern oil. The has created a bit more room for stock prices to rise while staying under the Fed’s 2% inflation target.
The GDP figures were again revised down for Q1, with the NGDP growth YoY change now down to 4.67%. I don’t normally put much importance on soft 1st quarter numbers, since they are typically seasonally weak.
The latest figure does continue the downward trend since the Fed started tightening policy to reduce inflation however.
Real GDP has been more stubborn, in part reflecting positive real shocks in the form of erstwhile increased immigration and perhaps the AI boom.
Core PCE inflation had been steadily declining until Q2 of last year. Hence, the Fed’s effort to tighten policy has largely stalled since Q3 of 2024.
The Fed Funds futures market is pricing in 2 Fed rate cuts by the end of this year with 3 more cuts to follow by early 2027.
So markets anticipate a continued slow glide down in NGDP growth, with no recession in sight.
It’s important of course to keep in mind that we’re living in very dangerous times in which we should likely expect some more negative real shocks, and as mentioned previously, potential gains in stock prices are still very limited absent some positive real shocks. Caution continues to be warranted.
PS: I’ve finally begun to stabilize after being diagnosed with shingles 3 weeks ago. This is an excruciatingly painful condition. I hope all who read this will get vaccinated against it at 50 years-old, if not sooner. I’m only 49, and delayed getting the vaccine because it’s fairly expensive without insurance coverage, which typically doesn’t cover it until age 50. Hence, any dumb or bizarre statments made here over the past 3 weeks I will attribute to my illness and highly medicated state. : )
PPS: The updated market-based NGDP and output gap forecasts were updated this week, for paid subscribers. They were emailed early due to a bug in Substack scheduled posts at the time.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
Links to Data:
Economic Data Sources:
https://fred.stlouisfed.org/series/SP500
https://www.wsj.com/market-data/stocks/peyields
https://www.barchart.com/futures/quotes/ES*0/futures-prices
https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.
https://www.cnbc.com/quotes/.VIX
https://fred.stlouisfed.org/series/DTWEXBGS
https://fred.stlouisfed.org/graph/?g=Ee9i
https://fred.stlouisfed.org/series/T10Y3M#0
https://fred.stlouisfed.org/series/DGS10
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
https://tradingeconomics.com/commodity/crb?user=nunote
https://www.cnbc.com/quotes/@CL.1
https://www.cmegroup.com/trading/en
https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx
https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html
Hi Mike. Only now I read about shingles. I didn't know what it is.
I'm really sorry for what you are going through.
My warmest wishes for a quick recovery.
p.s. when I was 12 a got chickenpox and still I remember the pain and fever I went through.
Thank you. I'm better each day, but still weak and medicated.
I hope you're doing well.