Highlights for This Week Include:

• The Institute for Supply Management (ISM) November private sector business surveys and the Federal Reserve’s (Fed’s) December Beige Book are consistent with further economic growth.
• Meanwhile, the Atlanta Fed’s current estimate of fourth-quarter economic growth stands at a very healthy 3.3% while the Blue-Chip consensus estimate has now risen above 2.0%.
• Major stock indexes continue to make new record highs, and we see positive market dynamics including broad participation across industries and stocks, especially those that benefit most from economic growth. The advance/decline line on the NYSE Composite recently hit new highs, a sign that breadth remains strong and healthy.
• 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. See below for details.

November Business Surveys Remain Consistent with Further Economic Growth

At the beginning of every month, we get important insight into the private sector economy from surveys of the nation’s purchasing managers. Historically, these surveys of both services and manufacturing show a good correlation with the health of the overall economy.

While the ISM Services PMI fell in November, it remained in expansion territory for the 51st time in 54 months since recovery from the coronavirus pandemic-induced recession began in June 2020—consistent with a growing economy. 14 out of 17 service industries reported growing in November, while only 3 reported a contraction. Importantly, the prices paid indicator was little changed, pointing to cost pressures in line with pre-pandemic norms, and well below the elevated readings during the period of pandemic-related supply disruptions in 2020 - 2022.

The ISM Manufacturing PMI continues to signal contraction in manufacturing but at a slower rate and after a long period of weakness. While manufacturing remains weak, there are positive signs for demand, including the New Orders Index returning to expansion territory.

The Manufacturing PMI registered 48.4 (above 50 signals expansion), and the ISM notes that a Manufacturing PMI above 42.5 generally indicates an expansion of the overall economy. The historical relationship between the Manufacturing PMI and the overall economy suggests the economy is growing at a 1.7% annualized rate.

Fed’s Beige Book Also Consistent with Further Economic Growth

The Federal Reserve (Fed) also gathers information through interviews and online questionnaires of businesses and other sources to characterize changes in economic conditions across the 12 Fed districts. The Fed summarizes the findings in its Beige Book, which is published eight times a year. The December release suggests economic activity rose slightly in most Fed districts with expectations for growth rising moderately across most geographies and sectors. Business contacts expressed optimism that demand would rise in the coming months while consumer spending was stable.

Meanwhile, the Atlanta Fed’s current estimate of fourth-quarter economic growth stands at a very healthy 3.3%, while the Blue Chip consensus estimate has now risen above 2.0%.

Thoughts on Recent Market Dynamics

We remain encouraged by the major U.S. stock indexes that continue to make record highs with positive market dynamics. We are seeing broad participation across industries especially from stocks that benefit most from economic growth. The advance/decline line on the NYSE Composite Index recently hit new highs, a sign that breadth remains strong and healthy. Typically, there are bearish breadth divergences at major tops, but no such divergence exists right now.

Encouragingly, the cyclical Consumer Discretionary sector is decisively breaking out to all-time highs and 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 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 came in at over 8.0%, significantly higher than initial estimates of 4.0% at the start of earnings season.

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