Weekly Market Watch

Tricks, Treats, and Trade Truces

Last week, large-capitalization (cap) U.S. equities outperformed their smaller-cap peers, as the S&P 500^® reached an all-time high. Performance was driven by strong third-quarter earnings and the Federal Reserve’s (Fed’s) decision to cut the federal funds rate by 25 basis points (bps) and end its balance-sheet runoff. The Federal Open Market Committee’s (FOMC’s) September rate projections suggest continued easing at the upcoming December meeting; but at last week’s meeting, Fed Chair Jerome Powell recalibrated expectations in his statement, proclaiming that a rate cut in December is “far from a foregone conclusion.” U.S. Treasury yields adjusted higher following the Fed’s decision and commentary, and the 10-year Treasury yield rose back above the 4% level.

Market Outlook

We expect the U.S. government shutdown may extend into mid-November as the strain from suspended federal programs, payrolls and travel disruptions begins to outweigh political willpower. On the trade policy front, last week’s meeting between Presidents Trump and Xi resulted in a temporary trade truce. The United States reduced fentanyl-related tariffs from 20% to 10%, while China paused rare-earth export restrictions for one year and committed to resuming soybean purchases from the United States. Although a permanent trade deal was not reached, the de-escalation of trade tensions between the world’s two largest economies provides additional clarity for investors, in our view.

Table of the Week

Following a busy week of S&P 500 constituents reporting, the blended earnings growth rate experienced a significant improvement of 150 bps from the prior week.

The improvement was driven by strong results from several Magnificent 7 (Mag 7) companies. All Mag 7 reports so far, except for Meta Platforms Inc., have exceeded both top- and bottom-line estimates and provided favorable forward guidance.

The current earnings surprise, the percentage of companies which outperformed expectations, for the index stands at 83%. If this holds, it will mark the highest since second quarter 2021.

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