Daily market snapshot

• Stocks close lower: Major equity markets traded lower on Tuesday, retreating from record highs for the S&P 500 and Dow Jones Industrial Average. Sector performance was mixed, as real estate and consumer staples stocks posted the largest gains. In global markets, China stocks fell on weak trade data for September, with both exports and imports missing estimates*. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil was down on forecasts for slowing demand**, while gold traded higher.
   
• Corporate earnings season ramping up: Though early in the season, third-quarter corporate earnings are off to a solid start relative to expectations. Of companies that have reported, 80% have beaten analyst estimates, with an average upside surprise of 7.3%*. Earnings growth is expected to be broad, with nine of the 11 sectors forecast to report higher earnings year-over-year*. We believe the broadening of earnings performance should support the continued rotation of market leadership away from technology and communications services stocks, which led markets higher earlier in the year. With valuations expanding over the past few years, earnings will likely have to carry the heavy load in driving markets higher, in our view.
   
• Bond yields edge lower: The 10-year Treasury yield is down, at about 4.03%. Bond markets are currently pricing in expectations for 1.5% of Federal Reserve (Fed) interest rate cuts over the next 12 months, which would put the Fed Funds rate in the 3.25%-3.5% range***. The Fed's dual mandates of maximum employment and stable prices are returning to better balance as the labor market normalizes from a period of outsize strength and inflation gradually moderates, which should keep the Fed on track to continue cutting rates, in our view. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **International Energy Agency ***CME FedWatch}

• Stocks edge higher: Equity markets closed higher on Monday, on a quiet day from a macroeconomic standpoint. At a sector level, information technology and utilities were the top performers; however, performance was broad-based, with 10 of 11 sectors finishing the day higher.* Energy was the only sector in the S&P 500 to finish lower, reflecting some weakness in oil prices.* Overseas, both European and Asian markets closed higher following announcements from China's policymakers over the weekend for planned stimulus measures to support the struggling economy. Treasury markets were closed on Monday for the Columbus Day holiday. In the commodity space, both oil and gold finished the day lower. Markets will get a read on U.S. consumer-spending trends with the release of September retail sales on Thursday.
   
• Stimulus hopes send China stocks higher: After a volatile week, which saw the CSI 300 Index decline by 7% last Wednesday, the rally in China stocks resumed overnight, with the CSI 300 index gaining nearly 2%.* On Saturday, China's Finance Ministry held a press conference to outline planned fiscal support for China's economy. While no headline figure was provided as to how large the fiscal package would be, the Finance Ministry did address specific areas of the economy it plans to support. Support measures included alleviating the debt burden on local governments, and funding for local governments to purchase unsold homes from developers.* China's economy has been dealing with a slumping property market, low consumer confidence and spending, and deflationary conditions. Inflation data from this weekend showed that consumer prices in China rose by a modest 0.4% year-over-year in September, while producer prices contracted by -2.8%.* In our view, large-scale stimulus will likely be needed to support economic growth in China. Until there is greater certainty on the size and exact use of fiscal stimulus, we expect that equity markets in China could remain volatile.
   
• Third-quarter earnings off to a strong start: While it's still the early days of third-quarter earnings season, results have been encouraging thus far. Last Friday, several U.S. banks, such as Wells Fargo and JPMorgan, reported strong results, helping send equity markets higher. Earnings-growth estimates are holding steady at around 3% for the S&P 500 in the third quarter, which if achieved would mark the fifth consecutive quarter of positive earnings growth.* At a sector level, information technology and communication services are expected to lead the way, with estimates calling for double-digit earnings growth.* Additionally, health care is expected to see healthy earnings growth of roughly 9%.* Looking ahead to full-year estimates, expectations are for S&P 500 earnings to grow by roughly 9% in 2024 and nearly 15% in 2025.* In our view, current valuations have limited scope to expand. Therefore, healthy corporate profit growth will likely be a necessary ingredient in sustaining the bull market.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet}

Friday, 10/11/2024 p.m.

• Markets move higher: U.S. stock markets were higher on Friday, with the S&P 500 outperforming the technology-heavy Nasdaq. Sector leadership was driven by financials, which benefited from strong earnings reports from big banks like JPMorgan and Wells Fargo. Financials and industrials were the best-performing sectors of the day, while the lagging sectors included technology and consumer discretionary*. This is in line with the sector trends over the past several weeks, in which cyclical sectors have outperformed technology and growth sectors broadly. In our view, this broadening of market leadership likely has legs, especially as the Federal Reserve continues its rate-cutting cycle and as earnings growth is driven by both tech and nontech parts of the market.
   
• U.S. producer price index (PPI) inflation comes out in line with forecasts: PPI inflation data for August was in line with expectations. Headline PPI was flat month-over-month, while core PPI was up 0.2% month-over-month. Services inflation was the primary driver of the inflation reading, which was up by 0.2% monthly, while goods inflation actually decreased by 0.2%*. Within goods, energy and gasoline prices were a large contributor to the decline in prices*. Overall, the PPI inflation was in line with yesterday's CPI inflation reading, which continues to trend lower overall, but which has seen some more-persistent-than-expected components, particularly in services inflation. In our view, with CPI inflation now at 2.4% year-over-year, the last mile to the Fed's 2.0% target may be bumpy, but there are drivers that will likely continue to support a gradual move lower. These include lower wage gains over time, which should support lower services inflation, as well as an eventual move lower in the shelter and rent components of the basket.
   
• Earnings season kicks off on a strong note: The third-quarter earnings season kicked off in earnest on Friday, with big banks such as JPMorgan and Wells Fargo reporting earnings. JPMorgan noted in its reporting that consumers are "fine and on strong footing," and posted record net income figures and raised full-year guidance*. Meanwhile, Wells Fargo also topped analyst forecasts of earnings expectations and noted a more diverse set of revenue streams that helped offset a decrease in net interest income. The financial sector was the top-performing sector of the day on Friday as well. Overall, third-quarter expectations are for about 4.2% year-over-year earnings growth for the S&P 500, well below the 7.7% expectation in place at the end of June*. In our view, the downward revisions in earnings expectations for this quarter has set the bar lower and provides corporations an opportunity to once again beat earnings forecasts and raise guidance. This has been the case thus far with some of the early reporting from the big banks.

Mona Mahajan
Investment Strategy 

^{Source: *FactSet}

• Stocks close lower on inflation report: Major equity markets traded lower Thursday, with small- and mid-cap stocks trailing large-cap stocks. Sector performance was broadly lower, as energy and materials stocks led to the upside. Bond yields were up, with the 10-year Treasury yield near 4.07%. In global markets, Asia was higher, while Europe was down. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil was up on supply risks in the Middle East, and gold also traded higher*.
   
• Key inflation measures mixed - The consumer price index (CPI) ticked down to 2.4% annualized in August - above estimates for 2.3% - but the lowest reading since February 2021. Core CPI, which excludes more-volatile food and energy prices, edged higher to 3.3% on a year-over-year basis, also above expectations to hold steady at 3.2%**. Shelter inflation resumed its trend lower but remained elevated at 4.9% annualized, accounting for the majority of core inflation. We believe these readings are consistent with inflation that continues to moderate gradually, though the path lower will likely be bumpy, at times potentially slower than market expectations. This progress should be sufficient to keep the Federal Reserve (Fed) on track to continue its rate-cutting cycle, in our view. Average hourly earnings were up 4.0% annualized as expected, outpacing inflation, which should be supportive of consumer spending.
   
• Jobless claims rise: Jobless claims rose to 258,000*** this past week, above estimates for 229,000*. This reading reflects a labor market that is normalizing from a period of outsized strength, but not collapsing, which we believe is supportive of continued growth and the "soft landing" narrative for the U.S. economy. A cooling labor market should also lead to slower wage gains ahead, which typically ease services inflation.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **U.S. Bureau of Labor Statistics *** U.S. Department of Labor}

• Markets maintain momentum ahead of inflation data: U.S. stocks closed higher on Wednesday, with the S&P 500 hitting a new record high, as investors await the latest read on inflation set to be released on Thursday. The increase added to a solid gain on Tuesday, as markets continue to be buoyed by encouraging economic data and a more friendly policy stance from the Fed. Under the hood, technology and health care were among the best performers today, displaying some balance across defensive and growth areas. Gold and oil prices finished lower, with crude pulling back from a recent surge spurred by uncertainties in the Middle East. Emerging-market equities were a notable mover today, with Chinese stocks falling sharply, as some details around policy stimulus failed to live up to the expectations that have powered the October rally in China's stock market.*
   
• Rates on the rise: The most noteworthy move of late has occurred in the bond market, with interest rates jumping so far in October, as the strong September jobs report has prompted markets to rethink expectations for upcoming Fed rate cuts. Ten-year Treasury yields were higher again today, back above 4% for the first time in more than two months. The rally has been even steeper in short-term rates, with the 2-year Treasury yield also topping 4%, having been at 3.5% just two weeks ago.* It's encouraging to see that equity markets have not panicked in response to higher rates. We view the strength in stocks in the face of higher rates as appropriate, given that the upward move in yields is a reflection of economic resilience and not a jump in inflation. We don't think this signals a Fed that will have to abandon its plans for further rate cuts, but this is consistent with our existing view that the Fed will need to take a more gradual approach to its easing cycle, given the potential for economic strength to limit the pace of moderation in inflation in the coming months.
   
• Big finish to the week: The data calendar has been rather light so far this week, but that's about to change in the days ahead. The most intense focus will be on Thursday's consumer price index (CPI) report, which is expected to show a slight moderation in the headline figure, trending back toward its lowest levels since 2021. Stripping out the food and energy categories, core CPI is anticipated to hold near 3.2%. Categories like vehicle and leisure prices will be worth watching, but the real focus will be on shelter prices, which have been the fly in the ointment for falling inflation. Any signs that pressure from home and rent prices are abating will be encouraging. On the other hand, any indications that the ongoing strength in the economy is disrupting the disinflationary trend would likely be a spark for market volatility, at least temporarily. The spotlight will then swing on Friday toward corporate earnings reports, with the big U.S. banks (JP Morgan, Wells Fargo) kicking off earnings season. While trends in the labor market and inflation are central to the fundamental backdrop, we think the path ahead for corporate earnings growth will be a central driver of market performance as we head into and through 2025. Expectations are for roughly 15% EPS growth for the S&P 500 in 2025.* That is a lofty but achievable figure, in our view. We'd also characterize it as necessary, given the 20% year-to-date rally in the market and elevated valuations that have priced in an optimistic outlook for profits.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}