Market Recap - Week Ending Oct. 18

Stocks Higher; Existing and New Home Sales Data This Week

Overview:  Stocks continued to march higher last week in the U.S. as the S&P 500 reached fresh new all-time highs closing the week higher by 0.87%. Outside the U.S., international developed stock (MSCI EAFE) finished the week lower by -0.37%, struggling against the backdrop of a stronger U.S. dollar. So far in October, the ICE US Dollar Index (which measures the strength of the U.S. dollar relative to a basket of other currencies) has risen by more than 2.7%. Consumer spending data in the U.S. came in better than expected, as core retail sales rose 0.7% month-over-month in September while headline retail sales rose 0.4%. The continued strength of the U.S. consumer has been reflected in the Atlanta Fed’s GDPNow model, which now projects real GDP growth for the third quarter to come in around 3.4%. Investors will shift their attention to corporate earnings which will hit full stride in the weeks ahead. For the third quarter, year-over-year earnings growth for the S&P 500 is expected to come in around 3.4%, which would mark the fifth consecutive quarter of year-over-year earnings growth for the index (FactSet). On the data front, investors will get a look at existing and new home sales data on Wednesday and Thursday, followed by durable goods orders on Friday. With the next Federal Reserve policy-setting meeting scheduled to conclude on November 7, fed funds futures markets are pricing in with near certainty a 25 basis point rate cut in November, followed by about a 70% probability of an additional cut in December.

Update on Earnings (from JP Morgan): And we’re off! The 3Q earnings season began last Friday with reports from the largest U.S. banks. Currently, analysts are projecting pro forma earnings per share (EPS) of $60.01. If realized, this would represent y/y growth of 1.9% and a q/q contraction of -0.9%. Looking at the three main sources of EPS growth, revenues, margins, and buybacks are expected to contribute 2.2, 0.5 and -0.8 points, respectively. Zooming out, the macro picture is still supportive, though growth and inflation have slowed from breakneck paces. The Atlanta Fed’s GDPNow model is projecting 3Q24 GDP growth of 3.4% annualized, and consumer spending seems similarly resilient with y/y growth tracking at 2% for goods and 3% for services. Manufacturing activity, however, remains weak with PMIs close to cycle lows. So, while growth sectors like Information Technology, Communication Services and Health Care should experience another quarter of robust earnings growth, cyclicals like Materials, Industrials and Energy are struggling. Over the quarter, crude oil and natural gas prices decreased y/y by an average of 5.0% and 16.4%, respectively, hurting Energy sector profitability. In Industrials, transportation and capital goods activity is muted as companies postpone expenditures until interest rate and regulatory uncertainty dissipates. China’s centrality in global manufacturing and commodity demand is also hurting, particularly in Materials. But things are looking up. China’s stimulus, U.S. monetary easing and fiscal spending on energy and supply chain security should support a cyclical recovery. Indeed, all three sectors are expected to see double digit earnings growth by the second half of 2025.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC

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