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MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group

Highlights for this week include: 

• The Federal Reserve’s (Fed’s) latest Beige Book showed economic activity remained well in expansion territory. Overall, most Districts reported that firms have maintained a positive economic outlook for the coming months. However, inflation remains a major concern. 

• The September consumer and producer price reports showed inflation remaining stubbornly above the Fed’s 2.0% target. 

• We are anticipating another strong earnings season, which kicked off this week with mixed results from the major banks. Consensus expects S&P 500 year-over-year earnings growth of a robust 26% in the third quarter. 

• While higher bond yields and energy prices pose a headwind, we continue to favor stocks, which remain near all-time highs, supported by a solid economy, strong corporate earnings, and the ongoing Al investment boom. 

Fed’s Beige Book Consistent with Solid Growth but Inflation Remains a Concern 

The Federal Reserve’s latest Beige Book, which reflects reports from business contacts, showed economic activity remained well in expansion territory but lost a little momentum in the six weeks ended October 5. Overall, most Districts reported that firms have maintained a positive economic outlook for the coming months. However, increasing price pressures were a common theme in the Beige Book, with higher energy prices being a primary driver. 

This report is consistent with the business surveys from both the Institute for Supply Management (ISM) and S&P Global that we discussed last week and which showed healthy economic growth but accompanied by high inflationary pressures. S&P Global stated that its survey is consistent with economic growth of around 4% in the third quarter. This compares with the Atlanta Federal Reserve’s current estimate of 3.6%. 

Consumer Prices Remain Stubbornly Above the Fed’s 2.0% Target 

On Wednesday, we got the much-anticipated consumer price report for September which disappointed the market. The core CPI, which excludes food and energy, rose 0.3% in September, above the consensus expectation of +0.2%. Core prices are up 2.6% versus a year ago, stubbornly above the Fed’s 2.0% target. The market continues to assign the highest probability to one 0.25% interest rate hike by year-end. 

Labor Market Remains Healthy 

A healthy labor market is a key support for consumer spending. Consequently, we follow labor market indicators closely. Weekly unemployment claims, arguably the best labor market indicator, remain historically low. Initial jobless claims rose 1,000 to 199,000 in the week ended October 10. This marks the fifth consecutive week of sub 200,000 claims. Exceedingly low jobless claims have led to a steady decline in continuing claims, with both more than ten percent below their prior-year levels, consistent with a healthy labor market. 

Looking for Another Strong Earnings Season and We Continue to Favor Stocks 

Given the healthy economic conditions for both the U.S. and global economy, we anticipate another strong earnings season, which kicked off this week with mixed results from the major banks. Consensus expects S&P 500 year/year earnings growth of 26% in the third quarter (Q3). This compares to growth of 33% in Q2, which was well above initial consensus estimates. Current consensus estimates suggest only Energy and Technology are expected to outpace the S&P 500 index while Health Care is expected to be a drag on 3Q earnings. 

Given the massive investments taking place for Al and data centers by the hyperscalers (major Al service providers), Al monetization and productivity will remain key themes during the Q3 earnings season. 

Strong economic growth but persistent inflation is having a negative influence on Treasury yields. While higher bond yields and energy prices pose a headwind, we continue to favor stocks. Stocks remain near all- time highs supported by a healthy economy, strong corporate earnings, and the ongoing Al investment boom. 

Disclaimer 

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