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

Highlights for this week include: 

• September business surveys are consistent with an economy running on all cylinders, with Technology companies reporting by far the strongest activity. 

• The global business surveys reached a 40-month high. The outlook remained positive, with new order growth and business optimism about the year ahead both strengthening. 

• However, inflationary pressures remain a concern for both the U.S. and global economy. 

• We are anticipating another strong earnings season, which kicks off next week. Consensus expects S&P 500 year-over-year earnings growth of 27% in the third quarter, the highest heading into any reporting season since 2021, when we exited the pandemic shutdown. 

• 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. 

Business Surveys Show a U.S. Economy Firing on All Cylinders, but Inflation Remains Sticky 

We pay close attention to monthly business surveys from both the Institute for Supply Management (ISM) and S&P Global because they are timely and correlate well with current and future economic activity. This week, we received the service sector surveys from both organizations, after getting the manufacturing surveys last week. Encouragingly, the surveys from both are consistent with solid economic activity in both the service and manufacturing sectors. 

Current activity indicators remain well into expansion territory while new orders, which correlate with future activity, continue to grow. S&P Global showed service sector activity rising at the fastest pace in over five years on the back of a further sharp increase in new orders. S&P Global noted that Tech companies are reporting by far the strongest growth but also noted accelerating growth for consumer-facing businesses as well as industrials and healthcare, alongside sustained solid growth in financial services. However, these surveys continue to show inflationary pressures, driven by higher energy and transportation costs and supply chain bottlenecks. 

S&P Global stated that its surveys are consistent with economic growth of around 4% in the third quarter. This compares with the Atlanta Federal Reserve’s current estimate of 3.7%. 

Global Business Surveys show Fastest Rate of Growth for Over Three Years 

J.P. Morgan and S&P Global produce a composite global survey which combines both services and manufacturing and includes over 40 economic regions. They note that growth accelerated for the sixth month in a row to reach a 40-month high. They further state that the outlook also remained positive overall, with new order growth and business optimism about the year ahead both strengthening. However, the survey showed a re-acceleration in inflationary pressures due to rising energy and transportation costs spread across industry and services. 

Labor Market Remains Healthy 

A healthy labor market is a key support for consumer spending. Consequently, we follow labor market indicators closely. While September job growth came in below expectations at 29,000, this followed a strong August reading which has the three-month average job gain at 51,000/month. Given retiring baby boomers and low immigration, this level is roughly consistent with a balanced labor market. 

In addition, weekly unemployment claims, arguably the best labor market indicator, remain historically low. Exceedingly low jobless claims have led to a steady decline in continuing claims, with both more than ten percent below their prior-year level, consistent with a healthy labor market. 

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

Given the healthy economic conditions noted above for both the U.S. and global economy, we are anticipating another strong earnings season which kicks off next week. Consensus expects S&P 500 year/year earnings growth of 27% in the third quarter (Q3), the highest heading into any reporting season since 2021. This compares to growth of 33% in Q2, which was well above initial consensus estimates. Analyst estimates show the beneficiaries of Al infrastructure spending accounting for over 50% of S&P 500 earnings growth this quarter. 

Given the massive investments taking place for Al and data centers by the hyperscalers (major Al service providers), Al monetization and productivity will remain key themes during the Q3 earnings season. Last quarter, hyperscaler cloud revenue growth accelerated to 48% alongside surging revenue backlogs. This boosted investor confidence in the likely return on Al investment, with the major Tech firms once again showing stock market leadership. 

Strong economic growth but persistent inflation is having a negative influence on Treasury yields, with the 10-year Treasury touching a 24-year high this week. 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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