The December business surveys showed that while the manufacturing economy remains weak, the much larger service sector remains consistent with solid economic growth.

Highlights for This Week Include:

The December business surveys showed that while the manufacturing economy remains weak, the much larger service sector remains consistent with solid economic growth. The Atlanta Federal Reserve (Fed) is estimating fourth quarter economic growth of a healthy 2.7%.

The pattern of recent quarters shows healthy 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. See below for details.

Business Surveys Remain Consistent with Further Healthy Economic Growth

The ISM Services PMI registered its third highest reading of 2024 in December, indicating expansion for the 52nd time in 55 months since recovery from the coronavirus pandemic-induced recession began in June 2020. There was general optimism expressed across many industries, but tariff concerns elicited the most survey comments. The past relationship between the Services PMI and the overall economy suggests that the economy is growing at a 1.7% annualized rate.

While the ISM Manufacturing PMI continues to signal weakness in the smaller, more cyclical manufacturing sector, there are signs that the worst of the slowdown is behind us. New orders moved further into expansion territory, while production returned to expansion territory after 6 months of contraction. The current manufacturing downturn has lasted much longer than historical cycles, coming after the massive boom early in the pandemic recovery when the service sector still faced pandemic headwinds. We expect manufacturing to further normalize as we move through 2025.

We also pay close attention to S&P Global’s business surveys for the service and manufacturing sectors, which are also consistent with a strong service sector, continued weakness in manufacturing, but further economic growth as we start the new year.

Meanwhile, the Atlanta Federal Reserve is currently estimating fourth quarter economic growth of a healthy 2.7% annual rate.

Global Backdrop Shows Improvement

S&P Global also works with JP Morgan to produce the Global Composite PMI, which includes survey data from both services and manufacturing from over 40 countries. The December survey showed the rate of global economic expansion improved at the end of 2024, as growth accelerated to a four-month high and new orders strengthened.

The improvement showed regional and sectoral disparities, however, as a solidly performing service sector offset continued manufacturing weakness, while pockets of solid expansion in nations including the U.S. and India contrasted with contraction in the euro area, with the three largest Eurozone economies (Germany, France, and Italy) all signaling contraction.

Thoughts on Recent Market Dynamics

The Fed dampened animal spirits after its December meeting, highlighting an uncertain inflation outlook with its economic projections suggesting only 0.50% of interest rate cuts in 2025, down from 1.00% from the September projections. While stocks have been consolidating 2024’s strong gains since then, the major stock averages remain in uptrends established off 2022’s market low.

In addition, non-investment grade bonds continue to signal a low probability of future defaults, consistent with future healthy economic growth. Important high growth, risk-on sectors and industries remain consistent with further growth including semiconductors, and the Consumer Discretionary and Communication Services sectors. Defensive sectors, including Consumer Staples, Health Care, and Utilities, continue to underperform in a confirmation of risk-on market dynamics.

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.

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 (+19%), Technology (+18%), Financials (+12%), and Utilities (+19%) are expected to see the best 4Q earnings growth. Energy (-30%), 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.

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