There is no need for the Fed to cut. Indeed, the FOMC will be impressed by the resilience of the stock market on Friday. The early losses were trimmed as the S&P 500 closed with a fall of just 0.18%. The market remains well placed to break through 3,000.
Treasury yields should continue to back-up without disrupting the march towards higher equity valuations. The case for a bull market does not rest on ultra-loose monetary policy: share prices are being driven higher by something more profound.
This is now officially the longest economic expansion since official records began (1854). The strong pace of IT-related investment is helping companies innovate and hold costs down. Amazon revealed that AI cameras and scanners have been introduced in more than 20 fulfilment centres to improve efficiency.
Cumulatively, the introduction of new technology is helping to push unit labour costs down. In Q1, unit labour costs for non-farm businesses fell 0.8% y/y. On an annual basis, total (labour and non-labour) unit costs have been comfortably below 2% for a large part of the current economic upswing (now 121 months). Effective control over costs should prolong the current economic cycle. In this context, the strength of IT stocks (up 28.9% so far this year) is not a coincidence. Many of these companies are playing a critical role in helping to drive investment and productivity in the US economy higher.
