The US economy has shown resilience despite recent market volatility caused by rising Treasury yields.
The S&P 500 index has experienced a decline for three consecutive days, the longest losing streak since early September. The yield on the benchmark 10-year US Treasury has surged by 14 basis points over the past three sessions, contributing to a total increase of 46 basis points for the month. This increase in yields has coincided with geopolitical concerns and uncertainty surrounding the upcoming US presidential election, which has kept market participants on edge.
Despite the market volatility, corporate earnings have demonstrated solid performance, indicating the resilience of the US economy. Preliminary results for the third quarter show robust earnings momentum, with guidance for the fourth quarter improving over typical seasonal patterns. Analysts expect corporate profits to grow between 5% and 7% in the third quarter, contributing to an overall expected earnings growth of 11% for the full year of 2024. This growth is attributed to higher-than-expected income growth and increased household spending, which have boosted economic activity.
The Federal Reserve's commitment to adjusting monetary policy closer to a neutral stance is a focal point for investors. Recent economic data has exceeded expectations, but the Fed's Beige Book reveals that economic activity has remained flat across most regions of the US since early September, with mixed trends in consumer spending. It is anticipated that further interest rate cuts will be implemented to sustain growth amid declining inflation, with expectations of an additional 150 basis points by the end of next year.
Analysts maintain an attractive outlook on several sectors, including information technology, utilities, financials, consumer discretionary, and communication services. The resilience of corporate earnings and a favorable economic environment suggest that these sectors may continue to thrive despite market volatility. The interplay between interest rates and corporate performance will be crucial as the Federal Reserve navigates its monetary policy. The expectation of rate cuts could provide a supportive backdrop for equities, particularly in sectors sensitive to interest rate fluctuations.
Investors are advised to remain vigilant as they assess the implications of economic data releases and geopolitical developments on market dynamics. In summary, despite challenges posed by rising Treasury yields and uncertainty surrounding the upcoming election, the underlying strength of corporate earnings and the resilience of the US economy make a compelling case for continued investment in equities. The focus will remain on how these factors influence sector performance and overall market trends in the coming months.