The recent performance of equity markets has shown a slight pullback, with the Nasdaq declining by 0.6% from its all-time high and the S&P 500 dipping 0.3%. This retreat comes as investors remain cautious ahead of the upcoming US presidential election and critical labor market data set to be released on Friday. However, the latest macroeconomic indicators and robust earnings reports from major technology firms suggest that there is potential for further gains in the equity markets.
The US economy demonstrated solid growth in the third quarter, expanding at an annualized rate of 2.8%. This growth was primarily fueled by a notable increase in consumer spending, which rose at a 3.7% annualized rate. Additionally, goods spending surged by 6%, outpacing the 2.6% growth seen in services.
The ADP employment survey for October revealed a significant rise in private job creation, with 233,000 jobs added, far exceeding the anticipated 111,000. These figures, alongside recent revisions to the National Economic Accounts, indicate that the US economic expansion is likely to be sustainable, with minimal risk of a recession in the near term.
As the Federal Reserve maintains a restrictive monetary policy, expectations for rate cuts are growing. The latest GDP data indicates that personal consumption expenditures (PCE) inflation has moderated, falling to 1.5% from 2.5% in the previous quarter, with core PCE at 2.2%. The upcoming PCE price index report for September is anticipated to provide further insights.
With inflation metrics nearing the Fed's target, the path appears clear for a potential 25-basis-point rate reduction at the next Federal Open Market Committee (FOMC) meeting. Analysts predict a total of 50 basis points in rate cuts for the remainder of the year, followed by an additional 100 basis points in 2025. Historically, such rate cuts during non-recessionary periods have been beneficial for equity markets.
The combination of solid economic growth and anticipated rate cuts creates a favorable environment for risk assets. The structural growth narrative surrounding artificial intelligence (AI) continues to bolster investor sentiment. Recent earnings reports from tech giants Microsoft and Meta exceeded consensus estimates, with Microsoft showcasing strong growth in its cloud and software sectors, while Meta projected better-than-expected sales for the holiday quarter.
Despite a dip in their stock prices during after-hours trading, attributed to concerns over increased capital expenditures impacting near-term margins, the overall trend in AI-related capital expenditures remains positive.
The interplay between solid economic fundamentals and the Federal Reserve's accommodative stance is expected to provide a supportive backdrop for equities. As the market navigates potential volatility ahead of key political and economic events, the underlying strength of the economy and the transformative potential of AI are likely to play pivotal roles in shaping investor sentiment and market performance.
With a target of 6,600 for the S&P 500 by the end of 2025, the outlook for US equities remains attractive, driven by both macroeconomic stability and sector-specific growth narratives.