This morning, the attention of Wall Street will be on the U.S. economy and in particular the inflation situation. That is because at 8:30 A.M. (EDT) the Labor Department released its September Consumer Price Index (CPI) report, which came in higher than anticipated. Traders will speculate on how the new reading may affect just how aggressive the Federal Reserve is on the interest-rate reduction front at next month’s Federal Open Market Committee (FOMC) meeting. The equity futures, which were modestly lower heading into this important release, are presaging a negative start for the U.S. stock market when trading kicks off stateside.
The CPI data was not what central bank officials wanted to see, as most of the figures were hotter than expected. Specifically, the September CPI and the core CPI, which excludes the more-volatile food and energy components, increased 0.2% and 0.3%, respectively, last month, unchanged from the prior month. On a 12-month basis, the CPI and core CPI rose 2.4% and 3.3%, respectively, with the latter metric revealing an unexpected uptick in the pace of price growth during the final weeks of this summer.
The CPI information doesn’t necessarily change the narrative that the lead bank will again cut the federal funds rate in November, but given the stronger-than-expected price growth and favorable September labor market data, the reduction is likely to be a quarter point, to 4.50%-4.75%. The minutes from the September FOMC meeting, released at 2:00 P.M. (EDT) yesterday, showed that Fed officials were divided about whether its first interest-rate cut in more than four years would be 50 or 25 basis points, with the former winning out. Meanwhile, initial jobless claims for the week ending October 5th came in at 258,000, up 33,000 from the previous week’s revised figure and well above the consensus forecast of 230,000. The CPI and unemployment reports from the Federal Reserve’s monetary policy perspective were rather offsetting. That said, Treasury market yields took another leg up on today’s economic reports. Investors should note that tomorrow will bring the Labor Department’s companion report on September producer (wholesale) prices.
The major equity averages are getting a boost from a solid performance of late by the technology sector. The group’s strong rally is being led by shares of NVIDIA (NVDA), which have surged 25% in the last month after they fell back a bit, and are now trading in record high territory. The semiconductor giant has been the leading beneficiary of the artificial intelligence (AI) boom. Technology heavyweights like Meta Platforms (META), Alphabet (GOOG), Oracle (ORCL) and Microsoft (MSFT), and privately held OpenAI continue to unveil new AI technologies and products that require investment in NVIDIA’s processing chips. The strong showing from the technology stocks helped the broader S&P 500 Index hit a record high during yesterday’s bullish session. Today’s increase in Treasury yields, though, may put some initial downward pressure on the higher-growth technology stocks this morning.
Tomorrow will bring the unofficial start of third-quarter earnings season. The festivities will kick off with a number of reports from the big money center banks. Specifically, investors will get the latest quarterly results from Dow-30 member JPMorgan Chase (JPM) before the start of trading. Wall Street will be looking at the results for clues about how the U.S. economy is faring during the second half of 2024. We will also be getting results from Wells Fargo (WFC) tomorrow and Bank of America (BAC) next Tuesday. Investors should note that Berkshire Hathaway (BRKB) and famed investor Warren Buffet continue to reduce the company’s equity stake in Bank of America. Could this be a sign that the big banks underperformed in the third quarter? We shall see in the days ahead.
Overall, the consensus is forecasting mid-single-digit profit growth, on average, for the S&P 500 companies in the third quarter. This would be down notably from the roughly 11% advance recorded in the second period, but with the Fed likely to cut the benchmark short-term interest rate a few more times before year’s end, it may be good enough to justify the elevated price-to-earnings multiple for the S&P 500 Index. That said, we think that much like the last few quarters, those companies that fail to meet expectations and/or lower their prognostications for the remainder of this year, or for 2025, will be punished. Given this environment, we continue to recommend that investors closely look at the stocks of companies that have a history of delivering steady earnings and cash flow growth. These entities are less likely to be among those companies that disappoint. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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