US Stock Market Divergence Ahead of Key Data

Upcoming data may provide insight into the growing differences between the three major US stock market indices in the countdown to the Fed's easing.

Three Stock Markets Diverge

While the Nasdaq, Dow Jones, and S&P 500 all rose in May, the US major US indices started to diverge since the middle of the month. On the one hand, the Nasdaq continued to hit records, driven by AI-focused tech companies like Nvidia. On the other hand, the Dow Jones pared back gains and the S&P 500 was mostly flat.

The market closely watched April's CPI and how the figures may impact the Fed's actions. Although indices rose following the report showing slowing inflation, market growth also depends on avoiding inflationary pressures from a higher GDP coming up soon. Additionally, the Fed's preferred inflation gauge, PCE, must continue falling to support the market view of interest rate cuts starting in September.

These two reports are coming this week and will help determine whether these conditions are on track with the earnings season behind us.

GDP and PCE Expectations

The second reading of the US's Q1 GDP data is scheduled for release tomorrow, Thursday. It is expected to confirm a significant slowdown to 1.6%, down from the 3.4% annual growth in Q4 of 2023. However, this could be an outlier, as the Fed's GDPNow tool projects an annual growth of 3.5%. Additionally, post-pandemic volatility may result in an upward revision to the GDP number.

All attention will then turn to the PCE indicator scheduled for release on Friday, as it is understood to be pivotal for the FOMC's upcoming interest rate decision. Despite higher headline inflation readings, the PCE has been trending downward over the past several months, providing markets with some relief about prospects for easing monetary policy. The core PCE is expected to come in at 2.7% annual growth compared to the prior reading of 2.8%. However, a slight beat of even one decimal move could cause market unrest by interrupting the downward trend seen as necessary to convince members that inflation is declining.

DJ Slides After Double-Top

The Dow Jones has fallen sharply since briefly extending past the psychological 40000 handle to 40085, forming a double-top. Should downward momentum prevail, breaking below 38580 could drive prices to 37230 in the immediate aftermath of a 37830 breach. However, if the index can rebound above 39280, it may provide bulls a chance at 39650, with momentum potentially re-emerging to new heights.

Source: SpreadEx / Wall Street

Key Takeaways

Upcoming GDP and PCE data may provide insight into the growing divergence between the three major indices as investors await cues on the Fed's interest rate policy. While the Nasdaq hit new highs driven by AI gains, the Dow Jones pared back and the S&P 500 was flat. The markets will be watching Thursday's second reading of Q1 GDP and Friday's PCE inflation figure, as both could impact expectations for the start of rate cuts in September. The GDP is forecast to confirm slower growth but may be revised up, while a decline in the core PCE closer to 2.7% would support easing.