Highlights for This Week Include:

September inflation readings from consumer and producer prices came in mixed and suggest a less aggressive path for future Federal Reserve (Fed) interest rate cuts.

Consumer sentiment remains muted due to concerns over high prices but remains consistent with further economic growth. Inflation expectations remain contained though, which is a favorable backdrop for future Fed interest rate cuts.

Stocks continue to make new all-time highs, and we are encouraged by the broad participation of sectors making new all-time highs.

Attention is now on third quarter earnings season, and comments coming from the major banks that kicked off earnings remain positive on the economy and consumers. See below for details.

Mixed Inflation Readings Suggest a Slower Pace of Fed Rate Cuts

We recently received important inflation readings for September. The Consumer Price Index (CPI) increased 0.2% in September, the same as the prior month, but double expectations. Core prices (excluding volatile food and energy) rose 0.3%, also above the consensus. Annual CPI growth also came in higher than expectations and still above the Fed’s 2% target, with the overall rate at 2.4% and the core at 3.3%.

While the CPI reading suggests inflation remains sticky, softer-than-expected producer and import prices suggest broad inflation pressures remain in check. The Producer Price Index (PPI) for final demand was unchanged in September, below the consensus estimate of a 0.2% gain. In addition, import prices fell 0.4% in September, more than expected and the most this year.

As a result of these mixed inflation readings, interest rate markets are now assigning the highest probability to a 0.25% cut in short-term interest rates at the November 7th Fed meeting rather than a more aggressive 0.50% cut, which occurred at their September meeting.

Consumer Sentiment Remains Muted Due to High Prices

The University of Michigan Consumer Sentiment Index slipped in the preliminary October survey, giving back some of the gains in the prior two months. Both current conditions and expectations came down slightly, but do not show a breakdown in consumer attitudes that could weigh on spending and the outlook for economic growth which remain positive. Although the assessment of current and expected personal finances weakened somewhat, consumer views on long-run business conditions improved.

Consumers continued to express worry over high prices, with one-year inflation expectations picking up to 2.9% from 2.7% in the prior month. However, inflation expectations are down from earlier in this cycle and are hovering close to pre-pandemic levels. Contained inflation expectations create a favorable backdrop for the Fed to continue with the monetary policy easing cycle.

Thoughts On Recent Market Dynamics

After several months of consolidation, the S&P 500 Index has broken out to all-time highs. We are encouraged by major, economically sensitive sectors trading at or near all-time highs, including Financials, Industrials, and Materials. We are also encouraged by other sectors reaching all-time highs, including Consumer Staples, Utilities, and Health Care. After the narrow leadership we saw earlier in the year from technology-related sectors, this broad sector participation is a positive signal of health for the overall market.

The current bull market has been supported by strong economic growth, falling inflation, and interest rates. Healthy economic growth has supported corporate profits, and attention has now turned to the third quarter (3Q) earnings season, which started in earnest last Friday with several of the largest banks reporting. Comments coming from the major banks provide important insight on the economy and consumers, and importantly they remain positive on both.

Expectations are for S&P 500 3Q earnings growth of 3%. However, given the solid economic growth we are seeing for the third quarter, earnings will likely come in better than expected, similar to the pattern from recent quarters. Technology (+18%), Communication Services (+10%), and Health Care (+7%) are expected to see the best 3Q earnings growth. Energy (-28%), Materials (-5%), and Financials (-1%) are expected to see the worst.

Full-year earnings growth for the S&P 500 is expected to be 8% in 2024, and early estimates for 2025 are for 14% y/y growth.

Given the positive economic growth that we continue to see and the fact that corporate profits and future estimates remain sturdy, we remain encouraged by the recent stock market action.