With the current market dynamics, now is a perfect opportunity for investors to reevaluate their portfolios and explore new investment themes. In today’s Steady Investor, we discuss three themes to consider:
The European Central Bank Keeps the Rate Cuts Going – The latest meeting at the European Central Bank (ECB) produced the second rate cut in a row, lowering the bloc’s key interest rate from 3.25% to 3.5%. The signals for rate cuts in Europe are clearer than here in the U.S. The headline inflation rate in the eurozone hit 1.7% year-over-year, which means price changes overshot to the downside (the ECB also has a 2% annual inflation target). And growth has been a key concern – services growth is slowing, consumers are spending less-than-expected, and the region’s economic powerhouse—Germany—has barely grown since the pandemic. While the ECB declared after their meeting that economic data will determine the future path of rates, the fundamentals at this stage do not point to a robust growth environment. Markets are pricing in another rate cut at the ECB’s December meeting, which would bring the key interest rate down to 3%. Looking ahead, arguably the most bullish factor in today’s market is improving liquidity conditions. In September, global central banks cut interest rates 21 times, and excess liquidity in the G10 has only been higher twice in the last 50 years. All told, we have not seen this type of global synchronized easing since the pandemic, and it’s coming at a time when the developed world on balance is achieving modest—but still stable—economic growth. History suggests the next few quarters will be critical ones. If the Fed and other central banks stay on the policy easing path, while the economy continues to expand, and while inflation remains in check, we should get a soft-landing confirmation—which we think will be good for stocks.1
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Early Q3 Earnings Results Point to Economic Resilience in the U.S. – In looking for signs of economic resilience here in the U.S. this week, we look no further than corporate earnings. All told, we are off to a very solid start in the Q3 earnings season, with the bank-heavy sample of results at this stage of the reporting cycle not only beating estimates but also providing a very reassuring read-through about the macroeconomic backdrop. For the 48 S&P 500 members that have reported Q3 results already—some of which were key money center banks—total earnings are up +5.2% on +4.9% higher revenues, with 81.3% beating EPS estimates and 72.9% beating revenue estimates. This is a better beats percentage than we have seen from this group of companies in other recent periods. The message we’ve seen from major banks has been consistent: stable consumer spending and investment activity, with nothing problematic appearing in loan portfolios or in the broader economy. Looking ahead, combining the actual results that have come out with estimates for still-to-report companies in Q3, total earnings for the S&P 500 index are now expected to be up +3.6% from the same period last year on +4.6% higher revenues. The Q3 earnings growth pace would have improved to +5.8% had it not been for the Energy sector drag (decline of -24.2% for Energy).3
Retail Sales Rise More than Expected in September – The Commerce Department reported retail sales figures, and the picture that emerged is the same as it’s been all year. U.S. consumers continue to spend at a stable clip. In September, retail sales rose at a seasonally adjusted 0.4% month-over-month pace, up solidly from August’s 0.1% gain and 10 basis points higher than estimates. Excluding autos from the sales data shows an even bigger gap between sales figures and expectations, with retail sales coming in at 0.5% versus an expected 0.1% increase. Year-over-year, sales have risen by 1.7%, which is not adjusted for inflation. The message we see here is that consumers have not accelerated spending in a meaningful way over the past year, but they also have not retreated, either.4
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