The US economy in 2024 has presented Wall Street with a singular challenge — keeping up.
The latest monthly jobs report showed continued signs of strength in a labor market expected to cool quickly in 2024. This data, along with signs of resilience in the consumer, has economists feeling increasingly better about the outlook for economic growth.
“The economy’s momentum early this year has been stronger than we were expecting a few weeks (and months) ago,” JPMorgan chief US economist Michael Feroli wrote in a note to clients on Friday. “While we still expect growth to slow, we think the economy might perform better in the middle part of the year than we had previously forecasted.”
Feroli’s call for increased economic growth in the middle quarters of this year matches the broad shifts seen in consensus forecasts.
In January, Deutsche Bank chief global strategist Binky Chadha highlighted in Yahoo Finance’s Chartbook that consensus had consistently underestimated economic growth over the past year. That’s continued to play out, with quarter-over-quarter projections for economic growth in the first six months of this year increasing significantly since January.
Wall Street economists now expect the US economy to grow at an annualized rate of 1.8% in the first quarter, up from projections for 0.6% offered in January, according to Bloomberg data. Second quarter growth forecasts have also been revised up to 1.3% from 0.4% over that period.
Feroli boosted his firm’s forecast for Q2 GDP to 1.5% from 0.5% previously after Friday’s jobs report.
A ‘sustaining indicator’
Deutsche Bank senior US economist Brett Ryan, whose team removed their call for a recession in 2024 last month, said the shifting narrative in the US economy has largely been driven by a stronger-than-expected labor market preventing a downturn in consumer spending.
“The labor market is not usually a leading indicator, but it is a sustaining indicator,” Ryan told Yahoo Finance. “And what you earn is what gets spent.”
Average hourly earnings grew 4.3% annually in February, per data from the Bureau of Labor Statistics. This was a move down from January’s 4.5% annual wage growth, but, notably, that number remains above headline price increases seen in various inflation indicators and helps support consumer spending from a downturn, per Ryan. Headline inflation rose 3.2% in February.
Wage growth also comes as data shows few signs of widespread layoffs in the labor market, despite headlines of layoffs to start the year. That is counter to what Ryan’s team at Deutsche Bank had feared entering this year and also contributes to a more bullish outlook for the US economy.
“Firms are holding on to their workers,” Ryan said. “The way to interpret that is that it’s a tight labor market still, and firms are reluctant to part with their current workers …That’s what’s kind of holding things up right now.”
Markets find economic shifts ‘navigable’
Like the latest labor market data, inflation prints have also challenged the market consensus.
Tuesday’s read on inflation showed prices not falling as quickly as many had expected to start this year. This reiterated a more tempered outlook on inflation that first arose in January.
In turn, expectations for rate cuts from the Federal Reserve have moved to June from March.
“The hotter than forecast February core CPI reading will further add to Fed [officials’] cautiousness regarding the inflation outlook,” Nationwide chief economist Kathy Bostjancic wrote in a note to clients after the release. “While we thought a May rate cut was on the table, it is increasingly likely that the FOMC waits at least until June to start easing monetary policy.”
But as Tuesday’s roughly 1% rally in the S&P 500 showed, these shifts in the economic consensus and outlook for the Fed have done little to stifle a rally in US stocks.
Or as Oppenheimer chief market strategist John Stoltzfus told Yahoo Finance Live on Tuesday, the new economic consensus is proving “navigable” for markets.
“We think that essentially what really counts is this resilience that we’re seeing in consumer and business,” Stoltzfus said.
RBC capital markets head of US equity strategy Lori Calvasina also noted that the shift in economic forecasts has come alongside a rotation in stock market performance, where areas outside the “Magnificent Seven” tech stocks have begun to outperform.
“We have been arguing over the past few months that for the rotation in stock market leadership seen in November and December to resume, US GDP forecasts would need to keep improving and get closer to above-average levels,” Calvasina wrote in a note to clients on Sunday night.
“While we aren’t there yet, we’ve gotten a lot closer.”
As Calvasina highlighted, that shift isn’t fully underway just yet, as seen on Tuesday when the interest rate-sensitive small-cap Russell 2000 index (^RUT) ended its streak of outperforming the S&P 500.
Zooming out beyond one day’s trade, Goldman Sachs equity strategist Ben Snider has told Yahoo Finance the case is building for further stock gains outside of just tech stocks.
“From a macro perspective, the most important driver of US stocks is earnings,” Snider said on March 4. “And earnings are growing. They’re growing for the largest companies. They’re also growing for smaller companies.”
He added: “The strength we’re seeing in the economy and in corporate America is much broader based than just the AI trade that has captured so much attention recently.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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