The world’s largest technology companies soared in late trading after stellar results from Microsoft Corp. and Google’s parent Alphabet Inc. fueled confidence in the market’s most-influential group.

A US$250 billion exchange-traded fund tracking the Nasdaq 100 (ticker: QQQ) climbed 1.2 per cent after the close of regular trading. In a sigh of relief to investors worried about lofty valuations of the sector that has powered the bull market, Alphabet crushed sales estimates and announced a dividend. Its fellow megacap Microsoft also beat forecasts, lifted by corporate demand for the software maker’s cloud and artificial-intelligence offerings.

The late rebound came after the market got rattled by data that showed exactly what investors did not want to hear: a sharp slowdown in the world’s largest economy and stubborn inflationary pressures.  Gross domestic product increased at a 1.6 per cent annualized rate, trailing all forecasts. A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7 per cent clip.

“The recent GDP reading from the U.S. was bleaker than expected, and didn’t lend itself well to growth-stock sympathism,” said Sophie Lund-Yates at Hargreaves Lansdown. “To that end, the market’s reaction to these results mean more than in usual times.”

Treasuries sold off, with yields hitting fresh 2024 highs as the economic figures revived the “stagflation” chatter — bringing more uncertainty to the path of Federal Reserve policy. Swap traders pushed back the timing of the first rate cut to December. 

“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” said Chris Zaccarelli at Independent Advisor Alliance. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing.”

The latest economic data must harden the tone from the Fed next week some, said Krishna Guha at Evercore. “The Fed still goes into a holding pattern circling the airport until it gets a better read on forward inflation dynamics,” he said.

It appears economic growth is “coming back down to earth” after an unusually strong second half of last year, said Mike Reynolds at Glenmede.

The combination of slower growth and sticky inflation will undoubtedly increase the whispers around potential “stagflation risk,” potentially complicating the Fed’s job, according to Jim Baird at Plante Moran Financial Advisors.

“Stagflation chatter will surely pick up in the wake of these figures, but we’re less concerned with such an outcome as long as the labor market remains so strong,” said Ian Lyngen at BMO Capital Markets.

To Jeff Roach at LPL Financial, the economy will likely decelerate further in the following quarters as consumers are probably near the end of their spending splurge. 

“We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s 2 per cent target still looks a long ways off,” he noted.

In the short term, Thursday’s numbers don’t appear to be a green light for either stock bulls or bears, said Chris Larkin at E*Trade from Morgan Stanley. 

“The uncertainty is unlikely to ease pressures in a market experiencing its deepest pullback since last year,” he noted.

The most-relevant setback in the data is the acceleration of core inflation, according to David Donabedian at CIBC Private Wealth U.S.

“We are not far from all rate cuts being backed out of investor expectations,” he said, adding Fed Chair Jerome Powell will possibly deliver a more hawkish tone during next week’s Fed meeting.

Traders will scrutinize Powell’s comments for clues about the latest thinking around easing policy. He’s previously said that growth can run at a faster rate without stoking inflation.

Swap traders now see only about 35 basis points of Fed rate reductions for all of 2024, well below the more than six quarter-point reductions they expected at the start of the year.

“The main story remains ‘The Fed vs. The Economy’,” said Scott Helfstein at Global X. He believes the central bank is not apt to make any major moves ahead of the election in September or November. So, it comes down to the July and December meetings. “There is a lot of data that will come out before December — but one cut in 2024 looks reasonable,” he concluded.

Zaccarelli at Independent Advisor Alliance says he’s looking ahead to Friday’s PCE numbers because slowing inflation is the number one issue for the Fed. 

In addition, he noted that the rate cut (or even rate increase) debate has been heating up — and that’s what’s injected so much uncertainty into bond and stock markets lately.

“Our base case remains that inflation will slow in the months ahead, allowing the Fed to start trimming rates in September,” said Brian Rose at UBS Global Wealth Management.

Corporate Highlights:

• American Airlines Group Inc. expects a return to profit heading into the busy summer travel season after bad weather and delays linked to air traffic congestion weighed on the carrier’s early-year results.
• Southwest Airlines Co. is slowing growth, ending service at four airports and offering voluntary leaves to address “significant challenges” stemming in part from reduced deliveries of Boeing Co. planes.
• Airbus SE will further increase production of its advanced A350 widebody jet as the planemaker benefits from surging demand for long-distance travel and the crisis engulfing its arch-rival Boeing Co.
• Royal Caribbean Cruises Ltd. boosted its full-year profit forecast as demand for cruises continued to surge, prompting record price hikes.
• Caterpillar Inc. reported first-quarter results that showed machinery sales slipping from a year earlier and warned that the trend is expected to continue in its second quarter.
• Comcast Corp. reported a steeper-than-expected loss of internet subscribers.
• International Business Machines Corp.’s weak consulting unit sales disappointed investors, overshadowing its acquisition of software firm HashiCorp Inc.
• Ford Motor Co., rapidly retooling its electric vehicle strategy in a decelerating market for plug-ins, posted first-quarter results that beat expectations on strong sales of work trucks.
• Nasdaq Inc.’s profit fell the most in 14 years as firms continue to wait for the economy to stabilize before going public.
• Merck & Co. raised its annual profit and revenue forecast as the blockbuster cancer drug Keytruda continued to dominate the treatment landscape.
• Harley-Davidson Inc.’s first-quarter revenue beat estimates despite high borrowing costs and tighter consumer budgets.
• First Citizens BancShares Inc., which scooped up Silicon Valley Bank after the lender failed last year, lifted its guidance for lending income for 2024.
• Hertz Global Holdings Inc. reported a loss that was nearly three times worse than analysts expected as it accelerated sales of electric vehicles to reduce its fleet of Tesla Inc. models that have weighed on profits for the past year.

Key events this week:

• Japan rate decision, Tokyo CPI, inflation and GDP forecasts, Friday
• U.S. personal income and spending, PCE deflator, University of Michigan consumer sentiment, Friday
• Exxon Mobil, Chevron earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.5 per cent
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index fell 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.3 per cent to $1.0729
• The British pound rose 0.4 per cent to $1.2513
• The Japanese yen fell 0.2 per cent to 155.63 per dollar

Cryptocurrencies

• Bitcoin rose 1 per cent to $64,705.41
• Ether rose 1 per cent to $3,161.87

Bonds

• The yield on 10-year Treasuries advanced six basis points to 4.70 per cent
• Germany’s 10-year yield advanced four basis points to 2.63 per cent
• Britain’s 10-year yield advanced three basis points to 4.36 per cent

Commodities

• West Texas Intermediate crude rose 1.2 per cent to $83.77 a barrel
• Spot gold rose 0.7 per cent to $2,332.94 an ounce