Highlights for this week include:

• October’s CPI inflation reading came in softer than expected and has interest rate markets pricing out any additional rate hikes for this cycle. High inflation has been a major headwind for stocks, and this reading fueled a further rally in stocks while bond yields fell further.
• S&P 500 third quarter (3Q) earnings results were stronger than expected and represented the first quarter of year/year earnings growth since 3Q 2022. Earnings grew by +4% year/year and +10% excluding Energy.
• The year-end is historically a strong seasonal period for stocks. This, coupled with a potential end to interest rate hikes and better-than-expected profits, should further support stocks into year-end.

Lower-than-Expected Inflation Suggests an End to Fed Tightening

The Consumer Price Index (CPI) was practically unchanged in October versus the consensus estimate of a 0.1% gain. Energy prices fell 2.5%, its first decline since May, led by a 5.5% drop in gasoline. Energy was the biggest contributor to the flat-lining price growth last month. Core CPI, which excludes food and energy, rose 0.2%, the least in three months, and below the consensus of 0.3%.

Shelter, the biggest core CPI component, rose 0.3%, the second smallest gain since August 2021. Excluding shelter, 12-month and 3-month core CPI are running at 2.02% and 1.96%, respectively, right on top of average pre-pandemic levels. Importantly, leading indicators for shelter are signaling lower future shelter inflation ahead, which further supports the outlook for lower overall future inflation.

On a y/y basis, the headline CPI eased to 3.2% from 3.7% in the prior month, while core CPI ticked down to 4.0% from 4.1%, the slowest pace since September 2021. Both figures were below the consensus estimates of 3.3% and 4.1%, respectively. Energy prices fell 4.5% y/y, in negative territory for the past eight months. Core goods inflation was just 0.1% y/y, nearing deflation territory where it was prior to the pandemic.

Stocks rallied and bond yields fell sharply following this soft CPI report, and investors have now officially priced out any additional interest rate hikes for this cycle. In fact, interest rate markets are priced for a 0.25% rate cut by next June and for 0.50% of easing by next July.

Third Quarter (3Q) Earnings Results Have been Stronger than Expected

Companies reported the first quarter of positive year/year earnings growth since the third quarter of 2022. With results for 89% of index market capitalization in hand, quarterly S&P 500 earnings are tracking 4% above the same period in 2022. This represents a considerable improvement from the 0% growth that consensus expected at the outset of the season.

The Consumer Discretionary (+39%) and Communication Services (+38%) sectors reported the strongest year/year growth. Energy, which faced tough comparisons after 2022’s energy price spike, represented the largest earnings drag at the sector level. Excluding Energy, S&P 500 EPS grew by 10%.

The consensus is now calling for 4% 4Q profit growth and 11% growth in 2024. S&P 500 earnings estimates for one year ahead typically fall by 1% during the first month of 3Q earnings season, and 2024 earnings downgrades are tracking in line with the typical pattern. Health Care (18%), Communication Services (15%), and Technology (14%) are expected to lead 2024 earnings growth.