Highlights for This Week Include:

• Solid retail sales growth demonstrates a resilient consumer and is consistent with a healthy economy. Indeed, the Atlanta Federal Reserve’s tracking model is now indicating a very healthy third quarter economic growth of 3.4%.
• While some consolidation of gains can be expected, especially heading into the election, stocks remain near all-time highs, and we are encouraged by economically sensitive sector leadership.
• Attention is now on third-quarter earnings season, with most reporting companies so far posting better than-expected earnings, similar to recent quarters. The solid economic growth noted above suggests these better-than-expected earnings will continue. See below for details.

Solid Retail Sales Growth Demonstrates Resilient Consumer Consistent With a Healthy Economy

As a sign of consumer resiliency, retail sales rose a bigger-than-expected 0.4% in September. Vehicle sales were flat, while gas station sales continued to decline, mostly reflecting lower prices. This allowed for other purchases, with retail sales ex-vehicles and gasoline jumping 0.7%, one of the biggest monthly gains in the past two years. There were notable gains in spending on apparel, health and personal care, miscellaneous retailers, food services, and drinking places.

On a y/y trend basis, retail sales increased 2.3%, stabilizing near the growth rate of the past year, reflecting robust consumer spending. Although excess savings from the pandemic have dwindled, layoffs remain low, income is growing at a solid pace, and household wealth has jumped since the pandemic, all suggesting continued support for spending growth and the economy.

The strong retail sales number boosted the third quarter estimate of economic growth, with the Atlanta Fed now tracking at a very healthy 3.4% annualized rate. Such strong growth is consistent with the Fed sticking with a smaller 0.25% rate cut at its next meeting, instead of 0.50%. Interest rate markets are assigning a very high probability to a 0.25% cut at the November 7th Fed meeting.

Leading Economic Index Continues to Point to An Economic Slowdown

The Conference Board’s Leading Economic Index (LEI), designed to provide early indications of significant economic turning points, continues to suggest slower future economic activity. The indicators pointing to slower activity include weaker factory new orders, an inverted yield curve, building permit weakness, and a tepid consumer outlook.

However, the Conference Board’s Coincident Economic Index (CEI) remains consistent with a healthy economy. Of the CEI’s component indicators, which are used to determine recessions, payroll employment, personal income, and manufacturing and trade sales contributed positively to the index in September and slightly more than offset a decline in industrial production (which has been negatively impacted by Boeing’s strike and recent hurricanes weighing on oil and gas extraction).

We would note that persistent weakness in the Conference Board’s LEI is not being corroborated by other leading indexes, including the OECD Composite Leading Indicator, which continues to point to healthy growth in the months ahead. The stock market is also consistent with a healthy economy, as discussed below.

Thoughts On Recent Market Dynamics

While some consolidation of recent gains can be expected, especially heading into the election, the S&P 500 Index remains close 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 that have recently reached 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 and economy.

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 is in full swing.

Expectations are for S&P 500 3Q earnings growth of 3%. However, given the solid economic growth we are seeing for 3Q, earnings will likely come in better than expected, similar to the pattern from recent quarters. Indeed, with about 20% of the S&P 500’s market capitalization having reported, earnings are beating estimates by 5.7% in aggregate, with 72% of companies topping projections. Earnings are on pace for 6.3% growth, assuming the historical trend of estimate revisions through the end of the reporting season.

Technology (+18%), Communication Services (+10%), and Utilities (+6%) are expected to see the best 3Q earnings growth. Energy (-30%), Industrials (-9%), and Materials (-5%) 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 15% 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 positive on the economy and stocks.