S&P 500 Perks Up as Consumer Sentiment Extends Gains, But Risks Remain Elevated

CONSUMER SENTIMENT KEY POINTS:

• February consumer sentiment climbs to 66.4 from 64.9 previously, topping market expectations of 65.00
• The improvement in confidence levels suggests that Americans are more optimistic about the economic outlook, a good sign for household spending
• Elsewhere in the report, one-year inflation expectations rises to 4.2%, while the five-year ahead measure remains unchanged at 3.9%

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A popular gauge of U.S. consumer attitudes extended it recovery in February, rising for the fourth consecutive month and reaching its best level since January 2022, a sign that U.S. households are gradually becoming a bit more optimistic about the economic outlook.

According to preliminary results from the University of Michigan, its consumer confidence index edged up to 66.4 from 64.9 previously, moderately above expectations calling for an advance to 65.00, with the boost in morale likely linked to a strong labor market and easing inflationary forces in the economy.

For most of 2022, the surging cost of living was a major source of consternation for American families, but cooling price pressures are providing some respite by increasing real incomes or at least by preventing further erosion of purchasing power.

Delving into today’s report, the current economic conditions index soared to 72.6 from 68.4 at the start of the year, whereas the expectations indicator inched down to 62.3 from 62.7. For its part, one-year inflation expectations surprisingly halted its descent, pivoting higher to 4.2% from 3.9%, while the five-year measure was unchanged at 2.9%.

CONSUMER SENTIMENT CHART

Source: TradingEconomics

Immediately after the survey data crossed the wires, the S&P 500 whipsawed in search of direction, but eventually managed to erase the session’s early morning losses and moved into positive territory, albeit modestly. The improved confidence readings are a positive sign for future consumption, the main driver of U.S. GDP, suggesting that household spending could remain stable in the coming months. This may keep the economy afloat and prevent a recession, a welcome development for corporate earnings.

On the flip side, sticky inflation expectations, coupled with resilient demand, could lead the Fed to continue to raise borrowing costs in upcoming FOMC meetings, pushing the terminal rate well above 5.00% in an effort to restore price stability. This scenario could become a headwind for risk assets, effectively capping the 2023 rally on Wall Street.

S&P 500 FIVE-MINUTE CHART

Source: TradingView