The closely-watched U.S. PCE report was probably the key this week, and the inflation results were good news for the market—keep in mind that this is the Fed’s preferred gauge. Core PCE inflation cooled to 3.5% y/y in October, the lowest since April 2021 and continuing the downward slide since the start of the year. On a 3-month annualized basis, core PCE inflation has now sported a 2-hanlde or lower in four consecutive months. This is good news. Meantime, the ‘supercore’ measure, which drills into services ex-energy and housing, slowed to 3.9% y/y (lowest since March 2021), and the 3-month annualized rate carried a 2-handle (2.7%). This is also good news. Suffice it to say that the evidence on inflation continues to suggest that the Fed is done raising rates, and they are widely expected to be on hold again on December 13th. Further out, the market is pricing earlier and more aggressive rate cuts for 2024, but we’re not there yet.
Meantime, U.S. corporate profits rose in seasonally-adjusted terms in Q3, leaving them essentially unchanged from a year ago. And, that rate could swing back into positive terrain in Q4, assuming earnings hold up. To date, they have indeed held up very well considering the amount of tightening in the system. As a share of GDP, corporate profits ticked up in Q3 and, while they’re off the high set during the pandemic, they have hardly contracted as they typically do late in the cycle. This resiliency in profits is one reason why stocks have been able hold their ground and largely trade sideways for the past two years, even as valuations adjust to higher interest rates. Expectations for S&P 500 earnings growth are holding in firm at around 11% for 2024, based on Refinitiv’s bottom-up tally.