Prices, Consumer Spending Rose at a Moderate Pace in June

The Commerce Department reported on Tuesday that U.S. consumer spending and prices rose at a moderate pace during the month June. Slower economic growth and relatively static inflation could translate to a data-fueled Federal Reserve cutting interest rates this week for the first time in 10 years.

Consumer spending gained 0.3 percent due to an increase in services and outlays on other goods counterbalanced a decline in the purchases of motor vehicles.

“The Fed’s favorite price measure remains below target at the end of the longest expansion in history, which largely explains why it will be trimming rates tomorrow,” said senior economist Sal Guatieri of BMO Capital Markets.

Price Target Raised for S&P 500

The latest data comes as global investment firm Goldman Sachs raised its year-end price target for the S&P 500, but simultaneously, the firm also lowered its earnings forecast due to weaker economic activity and profit margins. The firm lowered its 2019 earnings-per-share forecast for the benchmark ndex by $6.

Still, the new price target for the S&P 500 means that a 24 percent gain for 2019. Additionally, Goldman Sachs set a 2020 year-end price target of 3,400, which represents a 10 percent rise from the 2019 target.

The U.S. economy added 170,000 nonfarm payrolls and the unemployment rate currently stands at a low 3.7 percent, but capital markets are still expecting the U.S. Federal Reserve to cut interest rates this week. Will a 1/4-point cut continue to provide strength for U.S. equities?

GDP Does Better Than Expected

The Commerce Department recently reported that Gross domestic product (GDP) fell during the second quarter to 2.1 percent, but still bested Wall Street analysts who were expecting a larger decline. GDP fell from 3.1 percent in the first quarter, which represents the weakest increase since the first quarter of 2017.

Initial forecasts were that that GDP would increase by 2 percent.

Economists at global investment firm Morgan Stanley said that a U.S. recession is not an unrealistic expectation, and the case for a bearish turn for the markets is a plausible one given a protracted U.S.-China trade war. Relatively speaking, this could put U.S. equities on watch for future weakness, giving exchange-traded fund (ETF) investors an opportunity to play U.S. versus international equities.

The majority of the capital market is looking for an interest rate cut by the Federal Reserve to propel the major U.S. indexes, but a sluggish showing in second-quarter earnings could mean that U.S. equities could be overvalued. Would a less-than-stellar second-quarter earnings showing put international equities over U.S. equities?

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