An interesting divergence is brewing between the stock market, which seems to be increasingly concerned about growth, and corporate earnings and economic data, which are indicating a much different message.

Since mid-April, it seems that the stock market's primary concern has become economic growth instead of inflation. This is evident with many forward-looking inflation measures peaking in March and April, while there has been a significant and sustained weakness in more cyclical sectors especially consumer spending and trucking.

So far, it's clear that the market is 'looking forward' to a slowdown in earnings even though there is no evidence to support such a development. Currently, the economic evidence is consistent with an economy that is decelerating but remains firmly in growth mode. Thus, we are seeing many stocks sell-off despite nominally strong earnings results.

In terms of the economic data, job growth continues to be strong which is a leading indicator of consumption. Q1 earnings season is also better than expected with earnings growth of 9.1% for the S&P 500 (SPY  ) and 70% of companies in the index beating earnings estimates, while 74% beat revenue estimates.

There's certainly been some softness in terms of industrial production, although it remains in expansion mode albeit at a much slower pace. New orders have also dropped from above 70 to just above 50. But, there is no consensus on whether this is due to unique factors like the war in Ukraine, lockdowns in China, or simply a reversal of the trend we saw in 2021 and 2020 when goods consumption soared while spending on services collapsed.

How investors feel about this debate should make a big difference in their positioning and outlook for the rest of the year.

A similar dynamic is present in housing where the longer-term fundamentals remain quite strong but in the short-term, there are signs of weakness due to higher mortgage rates impacting demand. A pause or slowdown isn't necessarily a negative as it could lead to more inventories and a healthier, slower ascent.

Maybe, the best way to examine this divergence is to look at the economy in terms of major components. Tech (XLK  ) and consumer discretionary (XLY  ) enjoyed historic gains in 2020 and 2021 due to the pandemic and stimulus payments. Now, they face tough YoY comps and a much different operating environment. So, on a 2-year basis, growth is spectacular but weak and in many cases negative on an annual basis.

Other parts of the economy like the labor market, housing, energy (XLE  ), industrial production (XLI  ), etc., could see a slowdown but are unlikely to go negative due to the longer-term fundamentals.