Good morning. The stock market meltdown on Monday was triggered by fears of a weakening economy, but a recession isn’t imminent, according to an expert.
The latest market carnage began on Monday morning when Japan’s Nikkei 225 index suffered its worst day since 1987. By market close, the Dow dropped over 1,000 points following a 611-point loss on Friday. Meanwhile, the S&P 500 fell over 3.2%, and Nasdaq futures slid about 3.4%.
The spark that led to the broader global market sell-off was really the jobs report on Friday, which came on the back of a Federal Open Market Committee meeting on July 31, where the committee decided not to cut rates, Gregory Daco, chief economist at EY, told me.
“Some, including myself, called that a missed opportunity, given that the totality of the data does point towards ongoing disinflation and a cooldown in economic momentum,” Daco said. Interest rates remain in the range of 5.25% to 5.50%.
However, Daco added: “The premise that the U.S. economy is headed towards or in a recession is, in my opinion, misplaced.”
When you look at the broad range of economic indicators, there’s positive forward momentum; much slower than it was a year ago, but it’s still positive, he said. The service sector is 90% of the U.S. economy, and Monday’s ISM services index showed that the sector is back in expansion territory, and that purchasing managers view business conditions as steady to stable, Daco said. “Nothing to write home about, but nothing to panic about, either,” he said. “When 90% of the U.S. economy is doing okay, that’s not a sign of an impending recession.”
I asked Daco about the implications of the stock market for finance leaders. “From a CFO perspective, now is not the time to panic,” he said. “Cool heads will prevail.” It’s often good to look at the factors that affect one’s own business, and external conditions “before making any drastic reorientation of strategy,” Daco said. There’s still positive job growth, and demand is still growing, not contracting.
Although there are still constraints in this high-cost, high-interest rate environment, as you look around the corner, you’re going to see the Fed easing monetary policy, Daco said. “It’s now becoming more clear that price growth inflation is much less potent than it was a few months ago, and it’s continuing to decline,” he said.
Daco also offered a related observation. “Something that I find extremely encouraging and that CFOs are aware of, is that productivity-growth efficiency has been rising, and that’s helping business leaders offset the high cost of talent,” he said.
Daco noted that tech stocks have been the leading sector, driving stock market gains and equities over the past few years, with ups and downs, but more recently, they’ve been driving equities up. “Now, if you start to see a correction in the tech sector, it will have implications for the broader equity market in the U.S. and abroad,” he said. “That is the risk scenario. But we’re not there yet.”
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna.
Leaderboard
Andrew Casey was appointed CFO of Amplitude (Nasdaq: AMPL), a digital analytics software developer. Casey succeeds Christopher Harms, who left the company in May. Casey arrives from Lacework, where he also served as CFO and oversaw its acquisition by Fortinet. Previously, he was the CFO of WalkMe, where he led the company’s IPO.
J. Kevin Vann was promoted to CFO of Helmerich & Payne (NYSE: HP), an oil and gas drilling rig contractor, effective immediately. He succeeds Mark W. Smith, who is retiring from the position. Prior to joining H&P, Vann was the CFO of WPX Energy, where he also served as chief accounting officer and controller.
Big Deal
Worldwide IT spending is expected to total $5.26 trillion in 2024, a 7.5% increase from last year, according to the latest forecast from research and consulting giant Gartner. Spending on data center systems is expected to increase by 24%, up from 10% in the previous quarter’s forecast, which Gartner said largely reflected increased planning for Gen AI.
“Generative AI is being felt across all technology segments and subsegments, but not to everyone’s benefit,” John-David Lovelock, a VP analyst at Gartner, said in a statement. “Some software spending increases are attributable to GenAI, but to a software company, GenAI most closely resembles a tax. Revenue gains from the sale of GenAI add-ons or tokens flow back to their AI model provider partner.”
Going deeper
“X is closing San Francisco HQ and relocating staffers to San Jose and ‘shared space’ with x.AI in Palo Alto, CEO Linda Yaccarino says in leaked email,” is a new report by Fortune’s Kali Hays. Owner Elon Musk said last month that the company formerly known as Twitter would be moving to Texas, but Yaccarino’s note to staffers said nothing about a move to the Lone Star State.
Overheard
“The trial evidence firmly established that Google’s monopoly power, maintained by the exclusive distribution agreements, has enabled Google to increase text ads prices without any meaningful competitive constraint.”
— Federal Judge Amit Mehta wrote in a 286-page ruling, saying that Google illegally monopolized the search market with $26 billion in payments to make its search engine the default option on smartphones and web browsers, Fortune reported.