Highlights for This Week Include:

• The December business surveys and November’s retail sales data are consistent with a healthy economy which supports a positive outlook for corporate profitability.
• The Federal Reserve (Fed) cut interest rates as expected but signaled fewer cuts in 2025. However, the Fed will remain data dependent, and we see gradually lower inflation in 2025.
• Stocks fell hard on Wednesday after the Fed’s outlook for fewer cuts in 2025. The primary uptrend on the major stock market indexes remains intact though and periodic pullbacks in stocks are common.
• The pattern of recent quarters shows economic growth continues to drive better-than-expected earnings growth, and the incoming data suggests this will be the case for the upcoming fourth quarter earnings season. We remain positive on the economy and stocks. See below for details.

December Business Surveys Remain Consistent with Healthy Economic Growth

One of the first major looks at current month economic activity is the S&P Global Flash PMI which is a preliminary (includes about 85% of responses) business survey including both service sector and manufacturing responses. The December reading signaled an acceleration of economic growth in December, with output rising at the steepest rate for 33 months, consistent with a growth rate of just over 3.0%. Firms' expectations of output in the coming year also lifted higher, hitting a two-and-a-half year high, reflecting growing optimism about business conditions under the incoming Trump administration.

However, the survey showed growth remains heavily skewed toward the service sector, where an acceleration of growth contrasted with a steepening decline in manufacturing. The goods-producing sector also reported a slight pull-back in future expectations, in part reflecting worries over the impact of tariffs and inflation. Encouragingly, confidence in the 12-month outlook has lifted to a two-and-a-half-year high, suggesting the robust economic upturn will persist into the new year.

Inflationary pressures meanwhile cooled further at the headline level in December. Average prices charged for goods and services increased at the slowest rate since prices began rising in June 2020. The latest easing pushed the survey’s rate of inflation further below the pre-pandemic long-run average, with an especially low rate of inflation again evident in the services economy, where charges rose at the slowest rate since May 2020.

Retail Sales Post Another Strong Month, Also Consistent with Further Economic Growth

Retail sales rose 0.7% m/m in November, propelled by strong sales at auto dealers and online retailers, and are up 3.8% versus a year ago. November's reading was slightly better than expectations and included upward revisions to September and October. This reading implies that the holiday shopping season is off to a strong start and that consumers remain resilient as the driving force for the economy.

The Atlanta Federal Reserve’s latest estimate for fourth quarter economic growth stands at 3.1% and is consistent with further healthy corporate profits.

Federal Reserve Cuts Interest Rates as Expected but Implies Fewer Cuts for 2025

The Fed lowered short-term interest rates by 0.25% to a range of 4.25% to 4.50%, which is now a full 1.0% lower since they started cutting rates in September. However, the market is now implying no cut in rates at the Fed’s January meeting, and their projections for 2025 show a slower pace of cuts moving forward.

Stocks favor low interest rates and reacted negatively to the news. Ultimately, economic growth and rising corporate profits provide the foundation for higher stock prices, and we continue to see healthy fundamentals as discussed above. In addition, the Fed will remain dependent on incoming inflation readings, and we see gradually lower inflation in 2025.

Thoughts on Recent Market Dynamics

Stocks fell hard on Wednesday after the Fed’s expected interest rate cut but outlook for fewer cuts in 2025. However, the primary uptrend on the major stock market indexes remains intact, and periodic pullbacks in stocks are common. The Fed will also be data dependent as noted above.

The pattern of recent quarters shows economic growth continues to drive better-than-expected earnings growth, and the incoming data suggests that this will be the case for the upcoming fourth quarter earnings season.

Communication Services (+20%), Technology (+18%), Financials (+12%), and Utilities (+19%) are expected to see the best 4Q earnings growth. Energy (-29%), Industrials (-5%), and Consumer Staples (-2%) 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.