Equities Fall Despite Strong GDP Growth & Moderating Inflation

Equities Fall Despite Strong GDP Growth & Moderating Inflation

Equity markets fell for the second consecutive week despite strong GDP growth and continued inflation moderation. Global equities (represented by the MSCI All Country World Index) were down -1.95%, and domestic stocks (represented by the S&P 500 Index) were down -2.52%.

GDP

The US government’s initial estimate of third-quarter GDP was released last week and showed the economy growing at an annualized 4.9% pace, the strongest quarter in two years. Beating expectations of around 4.7% and more than doubling Q2’s 2.1% pace, the acceleration of growth was mainly supported by strong consumer spending. Consumption grew at a 2.7% pace from 0.6% the quarter prior as consumers have so far seemingly shrugged off the higher rate environment, and in turn, higher borrowing costs.

PCE Price Index

The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, was released last week for the month of September. Core inflation continued the trend lower as the index grew at a 3.7% year-over-year pace for September. While this narrowly improved from August’s reading of 3.8%, core PCE is well off its 2022 highs of 5.6%, however, still above the Fed’s 2% inflation target.

Earnings Season

Earnings season continued to ramp up last week as big names such as Amazon, Alphabet (Google’s parent company), Meta, and Microsoft reported. With nearly half of the S&P 500 companies reporting Q3 results, 78% have beaten earnings expectations, and the blended growth rate for S&P 500 companies is 2.7% year-over-year to this point according to FactSet. The S&P 500 has experienced earnings declines in the past 3 quarters.

S&P 500

The S&P 500 crept into correction territory last week as it was down over 10% from its peak in July. Despite this pullback, the index is up nearly 9% on a total return basis year-to-date. The pullback in stocks has also benefited valuations of the index. Based on the forward price-to-earnings ratio, the index now sits below its 5- and 10-year averages along with multiple sectors.

US Federal Reserve

The US Federal Reserve holds their two-day policy meeting this week concluding on Wednesday. Markets heavily expect the Fed to keep rates unchanged and are focused on the path forward. According to the CME FedWatch Tool, Fed Funds futures are pricing in less than a 25% chance of an additional rate hike prior to year-end.

Looking Ahead

As the month comes to a close, multiple economic data releases are slated for this week. A labor market report for October will be released following a strong September as 336,000 jobs were added to the economy. The Institute for Supply Management’s (ISM) manufacturing and services indexes will also be released. Manufacturing PMI has been in contractionary territory for 11 straight months but has trended upward for the past 3 months.

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.