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

Highlights for this week include: 

• The first look at October’s business surveys showed private sector growth remained among the best seen over the past five years. However, the survey indicated that inflation remains a key concern. 

• The Federal Reserve (Fed) left interest rates unchanged this week. They noted strong economic growth but inflation above their 2.0% target and their desire to collect more information before their next move. 

• Given healthy third quarter economic readings, it’s no surprise earnings are once again coming in strong. Expectations are now for robust earnings growth of 29% for the third quarter (3Q). 

• 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. 

Preliminary October Business Survey Consistent with Strong Economic Growth with Inflation 

S&P Global provides an important early look at a given month’s private sector economic activity through their monthly business survey. The preliminary October survey, which includes about 85% of final respondents, showed growth rates in both manufacturing and services remained among the best seen over the past five years. S&P Global stated that the survey results are consistent with a robust 5% annualized economic growth rate to start the fourth quarter and noted healthy corporate earnings and hiring. 

However, the survey showed inflation remains a key concern, notably as higher energy costs filter through to impact a wide variety of goods and services while supply chain bottlenecks have intensified. 

This robust October reading comes on the heels of the just released third quarter GDP print, which showed strong economic growth of 3.4%. While the massive Al investment boom is driving growth, the GDP reading showed other parts of the economy strengthening. Consumer spending was also a key driver, coming in above expectations at a 3.8% rate, consistent with a resilient consumer despite higher energy costs. 

Federal Reserve Leaves Short–Term Interest Rates Unchanged 

The Federal Reserve (Fed) met this week and decided to maintain short-term interest rates between 3.75% to 4.00%. They noted that economic activity is expanding at a strong pace, spending has been resilient, productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. They noted that inflation remains elevated but that they want to accumulate more information before making another change to interest rates. They reiterated their commitment to price stability. 

Labor Market Remains Healthy 

A healthy labor market is a key support for consumer spending. Consequently, we follow labor market indicators closely. In addition to the positive labor market comments from the Fed and the positive outlook from the October business survey noted above, weekly unemployment claims, arguably the best labor market indicator, remain historically low. Initial jobless claims fell 1,000 to 194,000 in the week ended October 24. Jobless claims are at the lowest level since 1969 when the labor market was significantly smaller, consistent with a healthy labor market. 

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

Given healthy third-quarter economic readings, it’s no surprise earnings are once again coming in strong. This is the busiest week of earnings season, and we now have about 46% of the S&P 500 results. Expectations are now for robust earnings growth of 29% for the third quarter (3Q). This compares to growth of 33% in 2Q, 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. 

Earnings are beating estimates by 4.4% on aggregate so far, with 76% of companies topping projections to date. Earnings are on pace for 31% growth, assuming the historical trend of estimate revisions through the end of reporting 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 

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor. 

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