US stocks closed lower on Thursday following the release of the latest GDP report, which revealed that US economic growth slowed to 1.6% in the first quarter of the year, falling short of expectations. The Dow dropped by 375 points, or 1%, while the S&P 500 and Nasdaq Composite also experienced declines of 0.5% and 0.6%, respectively. Investors reacted to the news by anticipating a delay in the first rate cut from the Federal Reserve.
The report highlighted a concerning trend of economic deceleration after a robust second half in 2023, with GDP growth rates of 4.9% and 3.4% in the third and fourth quarters of the previous year. Additionally, inflationary pressures persisted as indicated by the annualized GDP chain price, which surged from 1.6% to 3.1% in the first quarter of 2024.
Market analysts expressed apprehension over the dual challenges of slowing economic growth and rising inflation. The Federal Reserve aims to see a sustained decrease in inflation, while investors seek growth in economic activity and corporate profits. The divergence in these trends has led to a revision in expectations for interest rate cuts, with investors now projecting only one cut by the Fed this year, down from an initial forecast of six cuts.
Concerns about stagflation, a scenario characterized by stagnant economic growth and persistent inflation, resurfaced in light of the latest data. JPMorgan Chase CEO Jamie Dimon cautioned about the potential reemergence of stagflation, drawing parallels to the challenging economic conditions of the 1970s.
The specter of stagflation has historical precedence, with the period between 1966 and 1981 witnessing significant losses in the US stock market after adjusting for inflation. Tech stocks bore the brunt of the market downturn on Thursday, with fears of a slowing economy impacting their growth outlook during the ongoing earnings season. Meta shares plummeted by 10.5%, while Microsoft and Amazon also experienced declines of 2.5% and 1.7%, respectively.
