Highlights for This Week Include:

• October’s headline Consumer Price Index (CPI) rose in line with expectations at 2.6% from a year earlier, which marked a pickup from September’s 2.4% reading. While this highlights an uneven path to the Federal Reserve’s (Fed’s) 2.0% target, the market is still assigning the highest probability to a 0.25% interest rate cut by the Fed in December.
• Consumer sentiment improved with expectations surging ahead of the election. This bodes well for future consumer spending. Small business optimism improved and should see further gains post-election.
• Major U.S. stock indexes remain at record highs on the election results. Market dynamics were positive heading into the election and have improved further over the past week. We are also seeing broad participation across industries especially from stocks that benefit the most from economic growth.
• Historically, equity markets climb post-election into year-end. The positive economic and profit growth that we continue to see suggests that this election year-end trend can continue this year. See below for details.

Consumer Prices Remain Stubbornly Above the Fed’s 2.0% Target

October’s headline Consumer Price Index (CPI) rose in line with expectations at 2.6% from a year earlier. This marks a pickup from September’s 2.4% reading, highlighting that while the trend is toward lower inflation, the path is now uneven after a steady trend lower from 2022’s 9.0% peak. Core prices, which exclude food and energy items in an effort to better reflect inflation’s underlying trend, were up 3.3%, also in line with consensus expectations and reflecting sticky inflation.

The market is still assigning the highest probability to a 0.25% interest rate cut when the Fed meets in December, but this will be influenced by one more payroll report and CPI report before the meeting. The evolution of data since the Fed provided economic projections in September has been strong on balance, with core inflation slated to end the year higher than the Fed's median projection of 2.6% and the unemployment rate likely to end the year below its median projection of 4.4%.

Consumer Sentiment Improves with Expectations Surging

Heading into the election, consumer sentiment improved for the fourth consecutive month, rising 3.5% to its highest reading in six months. While current conditions were little changed, the expectations index surged across all dimensions, reaching its highest reading since July 2021.

Expectations over personal finances climbed 6% in part due to strengthening income prospects, and short-run business conditions soared 9% in November. Long-run business conditions increased to their most favorable reading in nearly four years. Sentiment is now nearly 50% above the June 2022 trough but remains below prepandemic readings. This reading bodes well for future consumer spending.

Small Business Optimism Improves and Should See Future Gains with Election Over

The October NFIB Small Business Optimism Index rose with 9 out of 10 components increasing, but the index remained below the 50-year average for the 34th consecutive month. Owners expecting better business conditions ahead reached a cycle high, but the Uncertainty Index reached a new 51-year high, signaling election anxiety. Much of this uncertainty will be resolved with the election over, especially with a renewed emphasis on maintaining low corporate taxes and reducing regulation. However, tariffs and trade policy will remain a source of business uncertainty.

Thoughts on Recent Market Dynamics

We remain encouraged by the major U.S. stock indexes that reached record highs on the election results, with the Republican promise of extending the expiring tax cuts and reducing the regulatory burden. Market dynamics were positive heading into the election and have improved further over the past week. The S&P 500, Nasdaq 100, and small-cap Russell 2000 are all in healthy uptrends. We are also seeing broad participation across industries especially from stocks that benefit most from economic growth, including banks, software, transports, consumer discretionary, industrials, and small caps.

Historically, the non-investment grade (high yield) bond market has been a reliable indicator of the future direction of the economy and stock market. Importantly confirming the signal from stocks and recent economic readings, bonds are signaling a very low probability of future defaults (defaults rise during economic recessions).

Equity markets typically climb post-election into year-end. The positive economic and profit growth that we continue to see suggests that this year-end trend can continue this year. Healthy economic growth has supported corporate profits, and attention remains on the third quarter (3Q) earnings season, which is winding down.

Like the pattern from recent quarters, economic growth continues to drive better-than-expected earnings growth. Expectations are now for S&P 500 3Q earnings growth of 8.3%, significantly higher than initial estimates of 4.0% at the start of earnings season. With over 86% of the S&P 500’s market capitalization reported, earnings are beating estimates by 6.5% in aggregate, with 67% of companies topping projections.

Communication Services (+22%), Technology (+20%), and Utilities (+19%) are now expected to see the best 3Q earnings growth. Energy (-29%), Materials (-12%), and Industrials (-4%) are expected to see the worst. Full-year earnings growth for the S&P 500 is expected to be 9% in 2024, and early estimates for 2025 are for 13% 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.