Is the Uptrend of US Stocks Under Threat?
The recent developments in the U.S. economy have created a sense of optimism among investors, particularly following the Federal Reserve's September monetary policy meeting. As a result, the U.S. stock market has experienced a successful rebound, achieving a four-week streak of gains. This shift in sentiment is largely attributed to an easing of fears surrounding a recession, fueled by surprisingly strong indicators from the labor market. The prospects for aggressive interest rate cuts have also significantly diminished.
In the upcoming week, investors will need to remain vigilant as geopolitical issues continue to play a critical role in market fluctuations. Alongside these factors, inflation and the impending earnings season will also be pivotal in influencing market movements.
The outlook for a soft landing in the U.S. economy has grown more robust. Recent data published by the U.S. Labor Department indicates that the economy added 250,000 jobs in September, far exceeding market expectations. Furthermore, previous months’ employment figures for August and July were revised upwards. Notably, the unemployment rate has dipped from 4.2% to 4.1%, adding to the positive narrative.
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Moreover, the Job Openings and Labor Turnover Survey (JOLTS) released for August reported a peak in job openings at 8.04 million, the highest in three months. While the hiring rate fell to 3.3%, it matched the lowest level since 2013 when excluding the pandemic's early data. The services sector, an essential pillar of the economy, witnessed its fastest growth in over a year, with the Institute for Supply Management's (ISM) services index climbing to 54.9%, marking the highest level since February 2023.
Bob Schwartz, a senior economist at Oxford Economics, emphasized in a recent interview that the September job report significantly outperformed expectations and indicated accelerating wage growth. He identified the robust ISM services index as another indicator of the economy's swift expansion, asserting, "Consumer spending continues to grow at a strong rate, and alongside the easing financial conditions, there should be solid support for the remainder of this year and into next year. There remains vast room for improvement once political uncertainties diminish."
As expectations shift, interest rate pricing has also changed, with U.S. Treasury yields rising steeply. The two-year Treasury, which closely aligns with interest rate expectations, surged by 36.7 basis points to 3.93%, representing the largest weekly gain in 16 months. The benchmark ten-year Treasury yield rose 22.9 basis points to 3.98%. According to the FedWatch Tool from the Chicago Mercantile Exchange, the likelihood of a 25 basis point rate cut in November has escalated to nearly 90%.
Barclays interpreted the latest non-farm payroll report as a significant blow to the notion that labor demand is losing momentum, reinforcing the possibilities of continued economic resilience and a soft landing. They predict that the Federal Reserve will opt to cut rates by 25 basis points at their policy meetings in November and December.
Importantly, Federal Reserve Chair Jerome Powell has also downplayed expectations of aggressive monetary easing. "Overall, the economic situation is favorable, and we intend to use our tools to maintain it there. If economic developments proceed as expected, we will consider two more cuts totaling 50 basis points by year-end," Powell stated.
According to Schwartz, any forthcoming discussions of interest rate cuts are likely to heavily emphasize the labor market, with potential strikes making employment data more chaotic, complicating the decision-making process. However, he believes that the overall impact of such disruptions will be temporary, reaffirming that the labor market and economy are sufficiently healthy to support a 25 basis point rate cut at the November meeting.
Market enthusiasm remains buoyant as U.S. stocks continue their upward trajectory since mid-September. The Dow Jones Industrial Average reached its 34th record closing of the year by Friday, and the S&P 500 Index is now perilously close to its historic highs, sitting less than 1% away.
Industry breakdowns from Dow Jones statistics show varied performances among sectors last week. A notable rise in crude oil prices boosted the energy sector, which surged by 7%. Communication services followed with a 2.2% increase, while utilities, financials, industrials, and technology stocks also advanced. In contrast, the materials and real estate sectors, which led gains in the previous week, fell behind. In technology, OpenAI's announcement of raising $6.6 billion in a new funding round, resulting in a post-money valuation of $157 billion, garnered significant attention. Additionally, several institutions have raised their price targets for Meta.
On the sentiment side, Bank of America quantified investor confidence through capital flow, position data, and market technology, reporting a rise in their cross-asset bullish indicator from 5.4 to 6, marking the largest weekly increase since December 2023. This reflects ongoing optimism among investors, heightened by robust inflows in emerging market equities and strong performance in credit market technical indicators.
As the calendar approaches the third-quarter earnings season, with major firms like JPMorgan Chase, Wells Fargo, and BlackRock set to kick things off next week, all eyes will be on potential market reactions.
Goldman Sachs’ chief U.S. equity strategist David Kostin has released a report raising earnings per share estimates for the S&P 500 from $256 to $268 for 2025, representing an 11% increase year over year. Notably, reflecting expectations for profit growth in 2025, Kostin also revised the 12-month price target for the S&P 500 from 6000 points to 6300 points.
Charles Schwab articulated in their market outlook that last week's U.S. stocks were momentarily impacted by tensions arising from the situation in the Middle East and strikes at East Coast ports. They caution that further developments in these areas could bear implications for inflation, potentially leading to increased prices and complicating the Federal Reserve's objectives while causing higher market volatility. Currently, inflation data appears to progress towards the Fed's targets, underpinned by a solid economic foundation, and market participants seem to align with the Fed's gradual approach to monetary easing.
Looking ahead, potential catalysts for the market loom within the coming week. These include key inflation metrics (the Consumer Price Index on the 10th and the Producer Price Index on the 11th) and the quarter’s earnings reports. Stronger-than-expected U.S. economic data has seemingly driven recent stock trends and may continue to bolster markets. However, following revelations from September's Barclays Global Financial Services Conference, there remains a cautious outlook regarding earnings reports from large banks. FactSet currently projects a 4.6% earnings growth for the S&P 500 in the third quarter, a downward revision from earlier expectations of 7.8% at the start of the quarter.