Highlights for This Week Include:

• Third quarter economic growth came in at a solid 2.8% growth rate, supported by consumer spending that rose at a 3.7% rate, the most since the first quarter of 2023. Strong consumer spending supports the argument for continued economic expansion that is also supported by consumer confidence which reached the highest level this year in October.
• The Federal Reserve’s (Fed’s) preferred inflation measure, the core PCE Price Index, which excludes the volatile food and energy categories, eased to a 2.2% annualized rate in the third quarter, closing in on the Fed’s 2.0% inflation target. This suggests the Fed can continue lowering interest rates to support the economy and labor market, rather than keeping rates high to cool inflation.
• 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. Earnings continue to come in better-than-expected, and the solid economic growth noted above suggests these better-than-expected earnings will continue. See below for details.

Resilient Consumer Spending Leads to Solid Third Quarter Economic Growth

Third quarter (3Q) economic growth came in at a 2.8% annualized rate, driven by strong consumer and government defense spending. Final sales to domestic purchasers, which excludes net exports and inventories, picked up at a 3.5% annualized rate, the most this year, and slightly above the historical average. It shows strong underlying domestic demand, supporting the argument for a continued economic expansion. The economy is on track for a solid expansion in 2024, as the growth rate has averaged 2.5% so far this year, close to average growth in the four years prior to the pandemic.

Consumer spending was the biggest contributor to growth last quarter. It rose at a 3.7% annualized rate, the most since 1Q 2023. Low unemployment, real wage gains, some pickup in consumer confidence, and a positive wealth effect from rising home values and a bull market in equities are among the factors supporting consumer spending and continue to bode well for the near-term outlook.

Even with stronger demand, inflation pressures eased in 3Q. The PCE Price Index slid to a 1.5% annualized rate, the slowest pace since the pandemic shutdown. More importantly, the core PCE Price Index, which excludes the more volatile food and energy categories, and is the Fed’s preferred measure of inflation, eased to a 2.2% annualized rate, closing in on the Fed’s 2.0% inflation target. Based on this, the Fed will likely continue to normalize monetary policy with markets assigning a very high probability of a 0.25% interest rate cut at its November 7th meeting.

Consumer Confidence Hits Highest Level This Year

The Conference Board’s Consumer Confidence Index rebounded in October to the highest level this year. Both the present situation and consumer expectations improved, with expectations rising to their highest level in nearly three years. Current and expected business conditions were both in positive territory. Current and expected job availability also improved, which suggests that the unemployment rate will likely remain low in the near term. The increase in confidence was broad-based across demographic and income groups and remains consistent with continued economic expansion.

Philly Fed State Indexes Show Economic Activity Strengthening Across More States

The September Philly Fed State Coincident Indexes showed growth broadening across regions, with economic activity up in 36 states, down in seven states, and unchanged in another seven states. Although this level still reflects pockets of economic weakness, improving breadth bodes well for overall economic growth. Indeed, the U.S. Coincident Index, based on the same methodology as the state indexes, posted an above-average 0.3% monthly gain and was up 2.8% from a year ago, consistent with further economic growth.

Thoughts on Recent Market Dynamics

While some consolidation of recent gains can be expected, especially heading into the election, stocks remain in a solid uptrend. We remain encouraged by the performance of economically sensitive sectors trading at or near all-time highs. After the narrow leadership we saw earlier in the year from technology-related sectors, the broad sector participation we are seeing 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 job growth that continues to support a resilient consumer. Healthy economic growth has supported corporate profits, and attention remains on the third quarter (3Q) earnings season, which is in full swing.

Expectations are now for S&P 500 3Q earnings growth of 5.9% after starting earnings season with expectations of about 3.0%. Like the pattern from recent quarters, solid economic growth continues to drive better-than-expected earnings growth. With about 57% of the S&P 500’s market capitalization reported, earnings are beating estimates by 6.8% in aggregate, with 65% of companies topping projections. Earnings are on pace for 7.0% growth, assuming the historical trend of estimate revisions through the end of the reporting season.

Technology (+18%), Communication Services (+11%), and Utilities (+7%) are expected to see the best 3Q earnings growth. Energy (-31%), Industrials (-11%), 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 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 positive on the economy and stocks.