Highlights for This Week Include:

An early look at November’s private sector economic activity is provided by the S&P Global Flash PMI survey, which encouragingly showed accelerating economic growth with lower inflation.

The Conference Board’s measure of consumer confidence continued to improve in November and reached the top of the range that has prevailed over the past two years. The reading is also well above the threshold that usually signals a recession ahead and remains consistent with further economic growth.

Major stock indexes are at record highs, and we continue to see positive market dynamics including 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.

Preliminary November Business Survey Suggests Accelerating Growth with Cooling Inflation

The November S&P Global Flash US PMI survey data (an early look at current month private sector economic activity) signaled a marked upturn in growth of business activity to a 31-month high, with output buoyed by the sharpest rise in demand for two-and-a-half years and improved business confidence. Firms' expectations of output in the coming year rose to the highest since May 2022, attributed to the prospect of lower interest rates, improved economic growth, and more supportive business policies from the new administration in 2025.

Growth was again driven solely by the service sector, but rising optimism and renewed hiring in manufacturing hinted at the upturn becoming more broad-based in the coming months.

The survey showed the rate of inflation in November cooling to the lowest since prices began rising in June 2020. The latest easing in prices charged for goods and services pushed the rate of inflation further below the pre-pandemic long-run average, with an especially marked moderation of inflation seen in the services economy, where charges rose only marginally and at the slowest rate since May 2020. Manufacturing selling prices rose at a slightly increased rate.

Labor Market Optimism Drives Up Consumer Confidence

Consumer confidence continued to improve in November and reached the top of the range that has prevailed over the past two years according to The Conference Board’s November Consumer Confidence survey. November’s increase was mainly driven by more positive consumer assessments of the present situation, particularly regarding the labor market. Compared to October, consumers were also substantially more optimistic about future job availability, which reached its highest level in almost three years. Meanwhile, consumers’ expectations about future business conditions were unchanged and they were slightly less positive about future income.

The proportion of consumers anticipating a recession over the next 12 months fell further in November and was the lowest since the question was first asked in July 2022. Consumers’ assessments of their family’s current financial situation fell slightly but optimism for their finances over the next six months reached a new high. Importantly, 12-month inflation expectations fell to the lowest level since March 2020.

Holiday Sales Expected to Hit a Record High

Holiday spending is projected by the National Retail Federation to hit a record high with forecasted sales growth of 3.0%. While sales growth is expected to fall slightly below the pre-pandemic average of 3.6%, this moderation reflects easing inflation rather than weakening demand. When adjusted for inflation, real sales are set to exceed last year. Driving this is real wage growth (wages adjusted for inflation), which has remained positive for a year and a half. Stock market gains and recent Fed interest rate cuts have also lifted consumer confidence.

Thoughts on Recent Market Dynamics

We remain encouraged by the major U.S. stock indexes that are at record highs with positive market dynamics. We are seeing broad participation across industries especially from stocks that benefit most from economic growth. We are also encouragingly seeing the cyclical Consumer Discretionary sector outperforming the defensive Consumer Staples sector, which is an important risk-on indicator.

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 continue to signal a very low probability of future defaults (defaults rise during economic recessions). The recent move lower in Treasury bond yields is also encouraging.

Equity markets typically climb post-election into year-end, and the positive economic and profit growth that we continue to see suggests that this year-end trend can continue this year. Like the pattern from recent quarters, economic growth continues to drive better-than-expected earnings growth. S&P 500 3Q earnings growth is coming in at 8.7%, significantly higher than initial estimates of 4.0% at the start of earnings season.

Communication Services (+23%), Technology (+22%), and Utilities (+19%) are seeing the best 3Q earnings growth. Energy (-29%), Materials (-11%), and Industrials (-4%) are seeing 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 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.