By: Linh Tran, Market Analyst at XS.com
The S&P 500 continues to maintain a positive tone as recently released U.S. economic data indicate that the economy is cooling in a controlled manner rather than weakening abruptly. This development keeps markets leaning toward a soft-landing scenario, thereby supporting investor sentiment, even as a degree of caution persists given that several risks have yet to fully dissipate.
Growth indicators reflect a slowdown in the economy, though not uniformly. The manufacturing sector remains under pressure, with regional surveys such as the Empire State and Philly Fed indices returning to negative territory, highlighting weak demand and elevated costs as ongoing headwinds for businesses. Preliminary PMI readings also edged lower from the prior month, suggesting that growth momentum is slowing, though not yet slipping into a severe contraction. This reinforces the view that the U.S. economy is undergoing an adjustment phase rather than entering a deep recessionary cycle.
In the labor market, job creation remains modest, while the unemployment rate has risen to 4.6%, the highest level in nearly four years. Meanwhile, monthly wage growth slowed to 0.1%, signaling a clear easing in wage pressures. These signals suggest that the labor market is cooling, helping to reduce the risk of a renewed rise in inflation. CPI y/y, released last week, declined to 2.7% from 3.0% previously, indicating that the disinflation trend is continuing at a gradual yet relatively sustainable pace.
With recent economic data pointing to slowing growth, easing inflation, and a gradually cooling labor market, the Federal Reserve now has some room to consider further rate cuts in a cautious and conditional manner, rather than being forced to maintain a prolonged restrictive stance as in the previous period. The absence of renewed inflationary pressure affords the Fed greater policy flexibility and reduces the risk of additional monetary tightening amid an ongoing economic adjustment.
For the S&P 500, the key factor is not an immediate rate cut by the Fed, but rather that real interest rates and bond yields do not continue to rise. When interest rates stabilize or trend gradually lower over the medium term, equity markets can retain underlying support even as economic growth slows. This environment allows the S&P 500 to continue performing constructively, albeit cautiously, with greater reliance on the quality of corporate earnings and capital flows rather than expectations of aggressive monetary easing.
However, beyond domestic factors, geopolitical risks and energy security concerns remain notable variables for the market outlook.
Tensions in the Middle East, particularly surrounding Israel – Iran relations, along with the risk of disruptions along the strategic Red Sea shipping route, are heightening concerns over energy supply and logistics costs. In addition, uncertainties related to Venezuelan oil and the Russia – Ukraine conflict remain key issues to monitor. Any shock that drives energy prices higher could disrupt the disinflation process, potentially forcing the Fed to maintain a cautious stance for longer and exposing the S&P 500 to periods of correction.