Market Optimism Follows Strong Earnings

Government Shutdown Affects Economic Data Releases

The lack of usual economic data releases has left investors guessing on the health of the U.S. economy. Economic data has been mixed, with private labor market indicators weakening, business surveys exhibiting stability, and mixed assessments on jobs from consumer surveys. Job data from payment processor, ADP, has exhibited two straight months of job losses of -3,000 and -32,000 in August and September, respectively. The U.S. composite PMI, which details sentiment among purchasing managers at manufacturing, construction and/or services firms, increased slightly in September on stronger service conditions. Finally, consumer confidence data showed an improved outlook for current job availability, but it was overshadowed by job outlook pessimism.

Federal Reserve Cuts Rates: Division Amongst Committee Members Widening

The target policy rate was cut by 0.25% to a range of 3.75%-4% at the October Federal Open Market Committee (FOMC) meeting. Two members of the FOMC dissented from the decision to cut by 0.25%, with Federal Reserve Governor Miran preferring a larger 0.5% cut and Kansas City Fed President Schmid preferring no cuts at the October meeting. The post-meeting statement had minor changes, noting employment risks rising in recent months and that size of the balance sheet would not be trimmed past December 1st. Fed Chair Jay Powell’s comments after the meeting suggested that a rate cut in December was not guaranteed, differing greatly from market expectations. Prior to the meeting, a rate cut in December had a 92% chance of occurring. Following the meeting, the likelihood dropped to 67%.

Fed Funds Rate Expectation: Market & FOMC

 Earnings Drive Stocks

The S&P 500 index, which represents the largest stocks in the U.S., advanced 2.3% in October on the back of stocks with the highest growth expectations. This year especially, investors continue to look for confirmation that the economy and corporate earnings can withstand uncertainty from a change in global trade policy. The current earnings season is no different. Not only have companies reported better-than-expected earnings, but estimates for the 4th quarter have increased from growth of 6% in April to 7.9% to close out October. On top of better earnings estimates, S&P 500 companies continue to grow their profit margins, which means retaining more of their sales. These better results have been due to Technology topping the leaderboard with impressive growth.

Inflation Steps Higher

The consumer price index (CPI) was one of the few data points released by the U.S. government in September in order for the Social Security Administration to tally its annual cost-of-living adjustment. While inflation growth was slower-than-expected in September, it still reached 3% on goods more exposed to tariffs, including household furnishings, recreational goods, and apparel. On a positive note, shelter prices were tame after briskly rising in August. Despite the upward trajectory in inflation, the Federal Reserve has turned its attention to supporting the labor market as cracks begin to form.

Longer Maturity Bonds Exhibit Volatility

While the 10-year Treasury yield declined about 0.07% from September to a level of 4.08%, the rate fell below 3.95% at one point in October on U.S. and China geopolitical uncertainty and on slower economic activity. As a result, the Bloomberg U.S. Treasury index advanced 0.6% in October, extending the return to 6% in 2025. From a corporate bond perspective, Meta issued a six-part, $30 billion dollar bond offering by taking advantage of lower interest rates to expand its capacity in the changing artificial intelligence technology landscape. Corporate bond offerings stalled in anticipation of the Federal Reserve’s decision to cut interest rates.

 

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