Growth
The U.S. economy expanded at a solid 2.8% saar, notching a second consecutive quarter of above trend growth. Consumer spending continued to power the economy forward, rising 3.7%, while government spending also looked strong. Business spending grew by a modest 0.3% with residential investment being a notable drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 11.9% and weighed on growth. Overall, despite concerns about the labor market and the manufacturing sector, economic momentum in the U.S. remains solid.
Jobs
The October Jobs report showed the U.S. economy added an underwhelming 12,000 jobs last month, although hurricanes and strikes likely muddled the data. In fact, survey response rates were below average, an above average 512K people reported being out of work due to bad weather and BLS estimates suggest 44K workers were on strike during the survey week. Downward revisions were also gloomy, removing 112K jobs from the prior two months. Other details looked promising. The unemployment rate held steady at 4.1% while wages, likely biased higher by weather, rose by a solid 0.4% m/m. While weaker than expected, this report was distorted, and overall data show that the labor market, while cooling, still looks solid.
Profits
The 3Q24 earnings season is wrapping up with more than 90% of market cap having reported. Analysts are currently expecting pro forma earnings per share (EPS) of $61.37, representing growth of 4.2% y/y and 1.3% q/q. Mega cap tech delivered another quarter of double digit earnings growth as did health care. Elsewhere, cyclical value sectors saw earnings fall. Moving forward, lower rates and regulatory uncertainty should provide a boost to manufacturing-tied sectors along with financials as management teams ramp up investment. This means less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.
Inflation
The October CPI report showed a slight but expected pick-up in inflation. Headline CPI rose 0.2% m/m, which party due to base effects, pushed the annual increase up to 2.6%, while core inflation rose 0.3% m/m and 3.3% y/y. Food prices continued to climb, while energy prices were flat. Core goods prices also held steady. Apparel prices (-1.5% m/m) delivered their softest print since 2020, likely due to unseasonably warm weather. This was offset by higher used vehicle prices (+2.7%). Across services, shelter inflation remained elevated at 0.4% m/m. In more welcome news, auto insurance prices fell modestly, although this was more than offset by a jump in airfares. While proposed tariff policy, if passed, could pressure inflation higher, short-to-medium-term disinflationary tailwinds remain intact. Improvement in auto insurance and shelter alongside easing wage pressures should keep inflation under control, allowing the Federal Reserve to continue cutting interest rates at a gradual pace until we gain more clarity on what policies the Trump administration intends to pursue.
Rates
At its November meeting, the FOMC unanimously voted to lower the federal funds rate by 25bps to a range of 4.50% to 4.75%. During the press conference, Chair Powell said that progress on disinflation and employment data led the decision, although changes to the statement language suggest the Fed acknowledges disinflationary progress has somewhat stalled above 2%. He didn’t provide much forward guidance given the high level of uncertainty, causing markets to be less certain about the pace and destination of future cuts.
Risks
- Geopolitical tensions and policy uncertainty may heighten market volatility.
- A slow-moving economy is more vulnerable to any kind of shock.
- Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.
Investment Themes
- Fixed income offers attractive levels of income and protection against an economic downturn.
- Broadening profit growth should continue to support a more inclusive stock market rally.
- Powerful structural and cyclical tailwinds should support select international markets.
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