Surprising GDP report resets backdrop for stocks

In April, you'd have to look pretty far and wide to find a bullish investor. Reports of looming stagflation — slow growth and rising inflation — and outright recession were everywhere in the wake of President Donald Trump's harsher-than-hoped tariff announcements.

It turns out that was the perfect time to buy stocks. True to form, the stock market found its footing even as sentiment soured in early April, and ever since, it's been climbing the proverbial “wall of worry” on hopes trade deals and tax cuts would trump tariff pains.

On Aug. 28, we received economic news that shed light on the economy and supported investors' bullishness this summer.

The stock market's record-setting run

Stocks have delivered eye-popping returns since April 8:

• S&P 500: 30%
• Nasdaq Composite: 41%
• Nasdaq 100: 38%
• Dow Jones Industrial Average: 21%
• Russell 2000: 35%

The gains contrast sharply with the steep losses the market experienced beginning in February 2025, when the first tariffs on Mexico, Canada, and China were announced.

Stock market declines from February highs to April lows:

• S&P 500: -19%
• Nasdaq Composite: -24%
• Nasdaq 100: -23%
• Dow Jones Industrial Average: -16%
• Russell 2000: -24%

U.S. economy delivers goldilocks second-quarter performance

Worry that tariffs will drive inflation higher remains, but concerns have tamed as inflation remained in check, despite a spike in the effective tariff charged on imports.

According to Yale Budget Lab, the effective tariff rate on global imports has swelled to 18.6% from 2.4% in January.

Despite that surge, the Bureau of Economic Analysis's second-estimate for the second-quarter GDP showed that Personal Consumption Expenditure (PCE) inflation was a tepid 2% last quarter, down from 3.7% in the first quarter.

“The hypothesis of a resilient U.S. economy just got support from the revised estimate of Q2 GDP for the U.S. This was increased from 3% to 3.3%, surpassing the consensus forecast of 3.1%,” wrote long-time economist Mohamed A. El-Erian on X, formerly Twitter.

Core PCE inflation, which strips out volatile food and energy, was 2.5%, down from 3.5% in Q1.

Overall, second-quarter GDP rose 3.3% in Q2, reversing a 0.5% contraction in GDP during the first quarter.

The boost in GDP was due to lower imports. If you recall, first quarter's contraction was fueled partly by a surge in imports to get in front of tariffs. It was also due to “an increase in consumer spending.”

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The U.S. Census Bureau previously said total retail sales rose 3.9% in Q2 from one year ago, led by e-commerce sales, which increased by 5.3%. Overall, retail sales totaled a whopping $1.9 trillion last quarter.

According to FactSet, S&P 500 companies reported second-quarter earnings growth of 11.8%, the third consecutive quarter of double-digit growth.

It's little wonder stocks have rallied strongly.

Economy isn't out of the woods yet

It's tempting to extrapolate the second-quarter strength, but there are concerning signals that last quarter's goldilocks quarter may have been a one-off.

• Rising unemployment
• Surging layoffs
• Upticking inflation

The unemployment rate is still historically low, but at 4.2% last month, it was at the high end of its range over the past year and up considerably from a low of 3.4% in 2023.

Not helping matters is a surge in layoffs this year, particularly in technology, and because of the DOGE cuts earlier this year within the government.

In July, layoffs were up 140% year-over-year, continuing a concerning year-to-date trend.

Challenger, Gray, & Christmas reports:

“Companies have announced 806,383 job cuts, the highest YTD since 2020 when 1,847,696 were announced. It is up 75% from the 460,530 job cuts announced through the first seven months of last year and is up 6% from the 2024 full year total of 761,358.”

Year-to-date, technology has seen the most job cuts, with job losses up 36% this year.

The recent weakness in the jobs market is even more concerning given that, despite tame inflation in Q2, we could be seeing tariffs flow into prices more in the third quarter.

Consumer Price Index inflation in July was a still-manageable 2.7%, below the 3% rate in January, but up from 2.3% in April before most tariffs kicked in.

We'll get the July PCE inflation report on Friday, Aug. 28.