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

Highlights for this week include: 

• The preliminary September business surveys came in stronger than expected, indicating growth accelerated for a fourth successive month to reach the fastest rate in over five years. 

• The ongoing Al boom is the major factor supporting economic growth, corporate profits, healthy labor market, and resilient consumers. However, it is also contributing to higher inflation and interest rates. 

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

Unexpectedly Strong U.S. Business Surveys but Upward Pressure on Inflation 

S&P Global provides an important early look at the current month’s private sector economic activity through their business surveys of both the manufacturing and much larger service sector. 

The September surveys came in better than expected, indicating growth accelerated for a fourth successive month to reach the fastest rate for over five years. The service sector reading unexpectedly jumped to a 5- year high, with new orders soaring to a 4-year high. The manufacturing reading also beat expectations, reaching a 4-year high with strong new orders. The employment index was encouraging, with both manufacturing and services posting multi-year highs, consistent with other recent healthy labor market indicators. 

S&P Global noted that the latest survey data are consistent with annualized economic growth of around 5%, with a 4% gain now signaled for the third quarter as a whole. This compares to the current Atlanta Federal Reserve third quarter estimate of 5.1% and the New York Fed’s 2.3% estimate. However, this strong growth is being accompanied by supply chain bottlenecks and companies reporting problems finding suitable workers, which is putting upward pressure on inflation. 

Drivers of Healthy Economic Readings and Resilient Consumer Spending 

The ongoing Al boom is touching many industries and having a major impact on economic growth. Total investment in data centers and related Al infrastructure is projected to total over $10 trillion from 2025 to 2032, according to a recent study by the Brookings Institution. The spending dwarfs previous investment booms, including those for the railroads, highway systems, and internet. It is fueling robust profit growth, especially for Al investment beneficiaries. Beneficiaries, led by semiconductor firms, include industrials, materials, energy, and utility stocks. Even banks are benefiting from financing the massive investment. 

It is also supporting a healthy labor market and stock market wealth effects, which are driving consumption. This is leading to solid economic readings and resilient consumer spending, despite higher energy prices and inflation. The healthy labor market continues to be evidenced by historically low weekly unemployment claims (just coming in at 197,000), which are arguably the best labor market indicator. 

We Continue to Favor Stocks 

Strong economic growth but persistent inflation is having a negative influence on Treasury yields, which rose above 5.1% this week, a level not seen since 2007. While higher bond yields and energy prices pose a headwind, we continue to favor stocks. Stocks remain supported by a healthy economy, strong corporate earnings, and the ongoing Al investment boom. 

Earnings are expected to increase approximately 33% in 2026, followed by another 15% in 2027, providing a solid fundamental backdrop for stocks. While we currently favor the Energy, Financials, and Health Care sectors, we continue to view Technology and other industries benefiting from the Al investment boom as core portfolio holdings. In our view, these companies should remain key beneficiaries of substantial spending on computing capacity, data centers, power generation, and other infrastructure needed to support the continued adoption of Al. 

Disclaimer 

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