Americans are wallowing in a “vibe-cession,” mostly due to disinformation spread by partisan news outlets. Whoever controls the media, controls the mind. However, an outright economic recession isn’t occurring…nor is it in the cards.

Even though pollsters are getting an earful of griping from rage-filled voters, the economy is actually on solid ground.

You wouldn’t know it from the apocalyptic political rhetoric, but the bull market lives on. To borrow comedian Larry David’s signature catchphrase: Wall Street is feeling pretty, pretty, pretty good.

The main U.S. stock market indices hover near all-time highs, driven by the resilient economy, better-than-expected corporate earnings, and hopes for a softer stance later this year from the Federal Reserve.

Corporate earnings are a major pillar of the stock market rally, with first-quarter 2024 results aligning with expectations for solid profit growth throughout the year. The strong economy is filling corporate coffers.

The past year’s above-average U.S. gross domestic product growth (GDP) has been driven by robust household spending. That said, elevated interest rates, reduced household savings, and slower wage growth pose challenges to the economy.

While consumer spending isn’t expected to collapse this year, it is likely to decelerate, leading to slower GDP growth.

The silver lining is that a slowing (but not imploding) economy will help contain inflation, which in turn will motivate the Fed to cut rates…which in turn will juice the economy and stock market.

A Goldilocks scenario? Not quite. Inflation is proving a bit too sticky, which is making the Fed cautious. But we’re darn close to a “not-too-hot, not-too-cold” economy.

As usual, the consumer is in the driver’s seat. Quarterly reports from various consumer companies have provided fresh insights into consumer behavior. Bellwether retail giants have been reporting a slight weakening in discretionary spending. Despite this, the labor market is likely to remain strong enough to sustain spending and avert a recession.

The first quarter has delivered a series of earnings reports that, by and large, have met or exceeded analysts’ expectations. This consistent performance is crucial, because it reinforces the narrative of economic resilience and corporate adaptability in the face of lingering post-pandemic challenges. Technology, health care, and consumer discretionary have led the pack.

The mega-cap tech giants continue to shine, driven by sustained demand for artificial intelligence (AI) and cloud computing. After the closing bell Wednesday, chipmaker and AI leader Nvidia (NSDQ: NVDA) reported a 262% year-over-year jump in Q1 2024 sales.

The health care sector also has performed admirably, with companies benefiting from the continuing focus on medical innovation and increased health care spending. Pharmaceutical giants have reported earnings that surpass expectations, propelled by existing product lines and new therapeutic launches.

Despite horrific headlines from the Middle East and Eastern Europe, we’re facing a relatively stable macroeconomic environment. Inflationary pressures, while present, have been managed through strategic pricing adjustments and cost control measures, allowing companies to maintain profit margins.

As the following chart shows, the benchmark SPDR S&P 500 ETF Trust (SPY) has surged well beyond its 20-, 50-, and 200-day moving averages (data as of market close Wednesday):

When SPY is above its moving averages, it indicates strong upward momentum. Investors generally perceive this as a bullish sign because it shows that buying pressure is consistently outpacing selling pressure over these different time frames. In essence, it means that the market is in an uptrend and investor confidence is high. This sustained upward trajectory often encourages further buying, as investors are reassured by the market’s strength.

The scenario where SPY is above all three moving averages also indicates strong market breadth, meaning that a wide range of stocks are participating in the upward move. This breadth is crucial because it shows that the rally is not driven by a handful of high-performing stocks but is instead widespread across the market. Broad participation across various sectors often leads to more sustainable rallies, reducing the risk of sharp corrections.

Looking ahead, the solid earnings performance in Q1 2024 sets a promising foundation for the rest of the year. I’m optimistic about continued profit growth, driven by several key factors:

Innovation and Investment: Companies are expected to continue investing in innovation and technology, driving productivity and efficiency gains. This is particularly true in the technology and health care sectors, where ongoing research and development efforts are likely to yield new products and services that drive revenue growth.

Consumer Spending: Consumer spending remains a critical driver of corporate earnings. With unemployment rates at historically low levels and wage growth continuing, consumer confidence is high. This bodes well for sectors such as consumer discretionary and retail, where increased spending is expected to translate into higher earnings.

Global Market Opportunities: Companies with a strong international presence are poised to benefit from growth in emerging markets. As global economies recover from the disruptions caused by the pandemic, increased demand from these regions is expected to boost earnings for multinational corporations.

While the outlook is broadly positive, it is important to remain cognizant of potential risks. Geopolitical tensions, supply chain disruptions, and unexpected shifts in monetary policy could pose challenges to corporate earnings growth. Additionally, competitive pressures in key sectors such as technology could adversely affect profit margins.

Equity valuations are stretched, which portends volatility amid the release of market-moving economic reports. For now, remain long stocks, but it’s prudent to hedge your portfolio with defensive assets (e.g., utilities and real estate). The bull market rolls on, but as Larry would put it: curb your enthusiasm.

In fact, the major equity averages took a breather from their long winning streak and closed lower Wednesday as follows:

• DJIA: -0.51%
• S&P 500: -0.27%
• NASDAQ: -0.18%
• Russell 2000: -0.79%

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John Persinos is the editorial director of Investing Daily.

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