Highlights for this week include:

The Federal Reserve (Fed) left short-term interest rates unchanged at 5.25-5.50% as expected. Higher interest rates have been a major headwind for stocks, and stabilization of rates would bode well for stocks.

The labor market, while moderating, remains healthy and suggests the Fed’s goal of a soft landing (lower inflation but a labor market that still supports economic growth) is still possible.

Profits are coming in better-than-expected. This, coupled with positive seasonal and other technical patterns, should also support stocks into year-end.

Federal Reserve Leaves Interest Rates Unchanged

The Federal Reserve left short-term interest rates unchanged at 5.25-5.50%, as expected. This was the second straight meeting that they didn’t raise rates after a historically rapid increase throughout 2022 and the first half of 2023. The interest rate market is now assigning the highest probability of no further interest rate increases for this cycle.

Rapid interest rate increases have been a major headwind for stocks, and most stocks rallied after the Fed decision. The benchmark 10-year Treasury yield also pulled back to a two-week low of 4.73% after recently reaching as high as 5.0%. Seasonal trading and other technical patterns call for a year-end stock market rally, and stabilization of interest rates would also bode well for stocks.

Labor Market Moderating but Still Healthy

Overly high wage inflation that leads to sticky general inflation has been a major concern for the Fed. Consequently, a major objective of the Fed’s interest rate hiking campaign was to cool the labor market and achieve a better balance of supply and demand for labor. While this week’s JOLTS report is still showing plenty of job openings, hiring has normalized to pre-pandemic levels. Wednesday’s ADP report also showed further moderation in hires.

The JOLTS report showed job openings and hires were little changed in September, each rising by less than 1.0% from the prior month to 9.6 million and 5.9 million, respectively. Both have declined since their peaks earlier in this cycle, but while hires have normalized near pre-pandemic levels, job openings are still about 35% higher than pre-pandemic.

The ADP report showed private payrolls increased by 113,000 in October, the second smallest gain since January 2021. On a three-month average basis, payroll growth continued to moderate, posting 127,000, the fewest since March 2021, indicating softening labor demand. Importantly, wage growth moderated to 5.7% y/y, the slowest pace since October 2021.

Third Quarter Profits Coming in Better-than-Expected

With 66% of S&P 500 companies having reported so far, 74% are beating third quarter estimates, compared to an average of 68% over the last four quarters. So far, companies have surprised on earnings by 6.3%, compared to an average of 1.5% over the last four quarters. Notable standouts in terms of earnings beats so far this quarter include Technology, Discretionary, and Communications. Since the beginning of earnings season, third quarter earnings have been revised up 3.2% to 3.0% y/y. Historically, upward earnings revisions have provided an important support for stock prices.