At face value, the notion that strong economic growth, or at least, stronger than previously expected economic growth, could actually devalue US equities is confusing to say the least.
Not only considering today’s release, which revised Q2 growth from 3.3% to 3.8% as part of the final estimate, but also comparing GDP numbers from Q1 to Q2, there is reason to be more optimistic about the US economy than was twenty-four hours ago.
So why have US equities sold off across the board?
The answer, as ever, is how today’s data affects future monetary policy decisions made by the Federal Reserve.
In simple terms, rate cuts are harder to justify when the economy is reportedly strong. Given today’s data, some are asking questions about how aggressively the Federal Reserve will choose to continue its easing cycle, which started only last week in the form of a 25 basis point cut.
While further rate cuts before year-end remain overwhelmingly likely, any suggestion that rate cuts are becoming less likely, or harder to justify, courtesy of strong data, will typically hurt equity pricing, with lower interest rates promoting higher economic growth.
In a nutshell, the good news of a strong economy can be considered bad news for equities in the current market cycle, as it questions the notion that lower interest rates are coming, a key catalyst for a continued market rally.
The proof is in the metaphorical pudding, of course, and while the dollar has gained today, US equities remain somewhat off the boil as they retrace from previous highs.