Highlights for this week include:

• Last Friday’s jobs report showed strong demand for labor and is consistent with further economic growth. September’s CPI report shows inflation stubbornly above the Federal Reserve’s (Fed) long-term 2.0% target. Both readings suggest interest rates will remain higher for longer.
• The S&P 500 Index has impressively rallied off important technical support around the 4200 level, which suggests recent weakness is a normal pullback within the ongoing bullish trend for stocks.

Labor Market Remains Strong

The September employment report showed payrolls expanded by an impressive 336,000 in September, well above the highest estimate and double the consensus of 170,000. Additionally, the prior two months were revised up by a total of 119,000, the most since December 2021. Job gains were broad-based across industries. The unemployment rate remained at 3.8%. Despite all the job creation, average hourly earnings (closely watched by the Fed) increased just 0.2%, bringing the y/y change to 4.2% from 4.3%.

Aggregate payrolls, a proxy for wage income, eased to 5.6% y/y, the slowest pace since March 2021, but also still higher than pre-pandemic. Importantly, it is now above inflation, suggesting support for continued consumer spending growth, albeit at a slower pace than earlier in this cycle.

Initial jobless claims (a timely economic indicator) continue to confirm labor market strength from other important indicators. The current level is in line with the pre-pandemic trend and is low by historical norms. A healthy labor market with wage income now above inflation is consistent with continued economic growth and suggests the Federal Reserve will keep interest rates higher for longer.

CPI Reading Suggests Sticky Inflation

September’s headline Consumer Price Index (CPI) rose 0.4% (3.7% y/y), while core (excludes volatile food and energy) climbed 0.3% (4.1% y/y). While trending lower, inflation remains stubbornly above the Fed’s 2.0% target.

Small Business Sentiment Remains Subdued

The NFIB Small Business Optimism Index fell for the second consecutive month in September. It has been range-bound since mid-2022, near its lowest level since 2013. Survey respondents remain concerned about the economic outlook, as more of them expected the economy to deteriorate rather than improve. Despite the economy performing better than expected so far this year, low business sentiment can be a drag on growth as firms hold back on capital expenditures and other expansion activities.

Stocks Rally Off Important Support Levels

The S&P 500 Index has impressively bounced higher off important technical support around the 4200 level. This is an encouraging signal, especially considering the events unfolding in the Middle East. As long as this support holds, most signs point to the recent market weakness as a normal pullback within the ongoing bullish trend in the market.

Third quarter earnings season begins Friday, with several major banks reporting earnings. Consensus expects flat S&P 500 earnings relative to last year. Excluding Energy, S&P 500 earnings are expected to grow by 5%, led by Communication Services, which is expected to see 28% earnings growth.