Hot Inflation, Concentrated Earnings: A Rockier Week

Hot Inflation, Concentrated Earnings: A Rockier Week

Stocks pulled back sharply last week, with the Nasdaq Composite down 4.48%, the S&P 500 down 1.94% to 7,659, and the Russell 2000 down 3.04%, while the Dow bucked the trend, up 0.67%. All three major indexes remain positive for the year, with the S&P 500 up 12.91% and the Nasdaq up 12.98% year-to-date.

Inflation and CPI

The pullback followed a hotter-than-expected inflation report, with headline CPI rising 3.7% year-over-year and core CPI 2.6%, while producer prices climbed 6.3% year-over-year. Existing-home sales, by contrast, rose 1.5% month-over-month, a modest bright spot.

Treasury Yields

Treasury yields eased slightly on the week even as inflation ran hot, with the 10-year yield at 5.09% and the 30-year at 5.43%, both down modestly from the prior week.

Third-quarter earnings season is off to a strong headline start, with S&P 500 aggregate net income on pace to grow 35% from a year ago, nearly three times the 10-year average pace. Beneath the surface, though, that growth is far from evenly distributed: excluding the Technology and Energy sectors along with Amazon, Alphabet, and Meta, earnings growth slows to 13%, still well above the historical average but a reminder of how concentrated this quarter’s acceleration really is. Together, those excluded sectors and companies are expected to account for nearly 77% of the increase in S&P 500 earnings this quarter.

Overall Growth

That concentration doesn’t mean the broader market is weak. A record 72 companies entered this reporting season with guidance above consensus, and overall earnings growth has broadened well beyond a handful of names even if the acceleration in profits remains concentrated in areas tied to the AI investment cycle and stronger energy earnings. With valuations elevated, continued market gains may require both halves of that story to hold: exceptional growth from the leaders and durable, above-trend growth from everyone else.

Fixed Income

For fixed income investors, today’s environment looks notably different than the years following the financial crisis. Current yields to worst across Treasuries, the Aggregate Index, MBS, investment-grade, and high-yield corporates all sit well above their respective averages since 2009, meaning bonds are offering meaningfully more income than they have for most of the past decade and a half, even after last week’s modest pullback in long-term yields.

Looking Ahead

Looking ahead, this week’s housing starts and flash PMI readings will help clarify whether last week’s hot inflation print was a one-off or the start of a more persistent trend.

As Always

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.