On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin examined the current state of the U.S. economy and outlined key investor watchpoints ahead of third-quarter earnings season.
U.S. hiring accelerates in September
Lin began by assessing the health of the U.S. economy in light of the September nonfarm payrolls data, released Oct. 4. “This report shows that the sky is certainly not falling,” he remarked, noting that the nation’s economy added 254,000 jobs in the month of September, significantly higher than the consensus expectation for around 150,000 jobs. In addition, he pointed out that there were upward revisions to both the July and August hiring numbers.The employment report adds to an array of encouraging labor market data points that were released earlier in the week, Lin said, including the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). The survey showed that U.S. layoff rates remain relatively low and that job openings appear to be stabilizing, he explained.In light of the economic data, Lin said that markets reduced their expectation for a supersized 50-basis-point (bps) rate cut in November, and instead are now assigning a roughly 85% probability of a 25-bps rate cut by the Federal Reserve (Fed). “The market’s expectation for a 25-bps rate cut seems reasonable,” Lin remarked, adding that Fed Chair Jerome Powell previously indicated the central bank is “not in a rush” to cut interest rates.In a base case soft-landing scenario, Lin believes the Fed will likely cut interest rates by 25 bps at each meeting going forward, until interest rates get to around 3%. However, he also emphasized that macroeconomic uncertainty continues to remain elevated, and that a soft landing is not the only possible outcome.
U.S. services sector also expands at faster-than-anticipated pace
Next, Lin turned to two key leading economic indicators released by the Institute for Supply Management (ISM). He said that these reports continued to show a divide between a robust services sector and a weaker manufacturing sector.Lin explained that the ISM’s non-manufacturing PMI (purchasing managers’ index) rose to a reading of 54.9 last month, versus consensus expectations for a reading of 51.7. A reading above 50 indicates expansionary conditions, while a reading below 50 indicates contractionary conditions. “This was a significant outpacing of expectations in the services sector,” he stated, adding that the new orders and production subcomponents of the index also grew more rapidly in September than in August.On the other hand, the ISM’s PMI for the manufacturing sector remained in contractionary territory in September with a reading of 47.2, Lin said—matching what was observed in August. While this marked the sixth straight month of contractionary conditions in U.S. manufacturing, Lin explained that it’s important to understand that the U.S. is much more of a services-based economy today. Approximately 75% of U.S. GDP (gross domestic product) comes from the services sector, he said, compared to only about 12% for manufacturing.
Key investor watchpoints for Q3 earnings season
Lin finished with a look ahead to U.S. third-quarter earnings season, which begins the second week of October. He said consensus expectations call for earnings growth of around 5% to 6%, year-over-year, for the S&P 500. “This would be a step down from the 11% earnings growth seen during the second quarter, but it would still be a relatively healthy number,” Lin remarked. In addition, it’s possible that the final third-quarter earnings growth numbers could come in higher than the start-of-the-quarter estimates, he remarked, noting this occurred in prior quarters.Earnings calls will be some of the key watchpoints for investors, Lin said, as they could provide clues about consumer spending trends. In addition, companies may also offer some guidance on what they expect to see during the upcoming holiday season, he said, explaining that this could be an important barometer of economic activity.Peering ahead into 2025, Lin said the industry consensus for the S&P 500 is earnings-per-share (EPS) growth of around 15% year-over-year. “From my vantage point, this number is a little bit optimistic, especially since the risks of an economic slowdown in the U.S. haven’t fully dissipated. Ultimately, we believe that with sentiment being directionally overbought and U.S. equities somewhat overvalued, investors may benefit from sticking close to their strategic asset allocation, rather than chasing into equity-market momentum,” he concluded.More By This Author:What’s Fueling The Rally In Chinese Equities?
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