Dear Friends,

The third quarter earnings season is off to a strong start, with banks leading the way and reporting an average earnings surprise of 6%. This positive momentum is supported by a steadily growing economy, which continues to drive revenue opportunities across various sectors. Additionally, recent economic data has frequently exceeded expectations, and consumer spending remains resilient. While these factors create a favorable backdrop for the broad market, potential challenges persist in the energy and industrial sectors. Find out more about what is driving the markets in this week’s newsletter.

Economy, Geopolitics, and Commodities

1. U.S. Economy Again Leads the World, IMF Says

The U.S. is increasingly pulling ahead of the world’s advanced economies, with a surge of investment paying off in higher productivity and wages. The International Monetary Fund highlights those divergent paths in its latest global scorecard, released Tuesday. In what has become something of a trend, the IMF upgraded the outlook for both U.S. and global growth, though more for the former. The IMF projects U.S. gross domestic product to expand 2.5% in the fourth quarter from a year earlier—half a percentage point higher than a July forecast, which itself was an upgrade from a January estimate. U.S. output rose 3.2% in 2023. That would be the fastest among the Group of Seven major advanced economies.

Global output is now projected to grow 3.3% this year, a smidgen above the prior estimate. Focusing just on wealthy nations, the U.S. is increasingly ahead. Advanced economies as a whole are expected to expand 1.9% this year after growing 1.7% last year. For 2025, the IMF projects the U.S. to grow 1.9%, versus 1.7% for all advanced economies and 3.1% for the global economy. The IMF attributed the latest boost in the U.S. outlook to higher nonresidential investment and stronger consumer spending, which is being supported by rising real, or inflation-adjusted, wages. Real wages tend to rise when productivity grows, because companies that become more efficient can pay their workers more.1

2. US Initial Jobless Claims Fall Back to Pre-Hurricane Levels

New applications for US unemployment benefits declined for a second week, to levels seen before Hurricanes Helene and Milton hit Southeastern states. Initial claims decreased by 15,000 to 227,000 in the week ended Oct. 19. The median forecast in a Bloomberg survey of economists called for 242,000 applications. “The impact of Hurricane Helene seems to be dissipating more rapidly than feared, which is a positive sign that the economic impact of the hurricane is not mushrooming through the region,” Stephen Stanley, chief US economist at Santander US Capital Markets, said in a note.

Continuing claims, a proxy for the number of people receiving benefits, increased to nearly 1.9 million in the previous week, the most in almost three years, according to Labor Department data released Thursday. While a rise in recurring claims traditionally indicates that people are having a harder time finding a job, the recent data likely reflects the impact from the two storms. A week-long strike at Boeing Co. may have also led to furloughs at idle suppliers, according to economists. The work stoppage continues after some 33,000 factory workers on Wednesday rejected a new labor contract. Before adjusting for seasonal factors, initial claims fell last week in North Carolina, Georgia and Tennessee — states that were impacted by Helene. In Florida, where Milton hit in early October, claims rose.2

3. US Core Capital Goods Orders Strengthen in September

New orders for key U.S.-manufactured capital goods increased more than expected in September, but business spending on equipment likely slowed in the third quarter. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 0.5% last month after an unrevised 0.3% gain in August, the Commerce Department’s Census Bureau said on Friday. Higher borrowing costs have been a constraint on business investment, though a loosening of financial conditions as the Federal Reserve prepared to cut interest rates boosted spending on equipment in the second quarter. Non-defense capital goods orders dropped 4.5% after declining 4.4% in August. Shipments of these goods dropped 3.6% after falling 2.0% in the prior month.

These shipments go into the calculation of the business spending on equipment components in the gross domestic product report. Business investment in equipment rose at a brisk 9.8% annualized rate in the second quarter, contributing to the economy’s 3.0% growth pace. Growth estimates for the July-September quarter are currently as high as a 3.4% rate. The government will publish its advance estimate of third-quarter GDP next week.4

4. China Schedules Meeting Expected To Reveal Fiscal Stimulus Details

China’s parliament will hold a highly anticipated meeting from Nov. 4 to 8, state media said Friday, according to a CNBC translation. Investors have been awaiting news of the gathering of the standing committee of the National People’s Congress, which is expected to announce details on any fiscal stimulus. Last year, the committee’s meeting in late October oversaw a rare increase in China’s fiscal deficit to 3.8%, from 3%, which was subsequently reported by state media. Earlier this month, China’s Minister of Finance Lan Fo’an told reporters that there was room to increase the deficit and issue more bonds. He indicated at the time that significant changes had to be processed before being announced. His remarks followed a meeting of top leaders in late September led by Chinese President Xi Jinping, which called for strengthening fiscal and monetary policy.

The People’s Bank of China has cut various rates and extended real estate support policies. Chinese stocks have surged in the weeks since the late-September meetings, with trading turning volatile in the absence of more concrete measures. Pang said the upcoming parliamentary meeting should confirm how the budget will be adjusted and communicate any potentially planned bond issuance. Analysts have tempered expectations that large-scale fiscal stimulus would directly pillar consumption, instead noting how struggling local governments would likely get support first. China’s economy grew by an annual 4.8% in the first three quarters of the year, slightly slower than the 5% pace observed in the combined first half of the year. Beijing has a target of around 5% economic growth for the whole of 2024.3

5. Tokyo Consumer Inflation Slows Below Bank of Japan’s Target

Consumer inflation in Tokyo slowed below the Bank of Japan’s 2% target but expectations for near-term rate increases remain high, especially given the yen’s renewed weakness. The consumer price index for the Tokyo metropolitan area rose 1.8% in October from a year earlier, compared with the 2.1% increase in September, government data showed Friday. Inflation data for the area are considered to be a leading indicator of nationwide CPI. Friday’s figures showed that the annual rate of overall price rises in Tokyo slowed for a second consecutive month in October. A milder rise in energy prices helped inflation come in below the central bank’s 2% target.

Economists expect the Bank of Japan to maintain its policy rate at 0.25% at the Oct. 30-31 meeting as Gov. Kazuo Ueda has expressed concerns about uncertainties over the global economy. But many still expect the central bank to raise interest rates in the near future as the domestic economy and prices show signs of improvement. A measure of underlying inflation, which strips out volatile fresh food and energy prices, picked up pace in October, Friday’s data showed. The so-called core-core CPI gauge rose 1.8% from a year ago, compared with a 1.6% rise in September. Service prices, a key indicator of consumer appetite, ticked up 0.8% in October, slightly faster than the 0.6% rise seen in September. The yen’s recent weakening could also put upward pressure on import prices. Earlier this week, the yen briefly depreciated beyond the 153 threshold against the dollar, hitting its weakest point in nearly three months. The pair stood around 152 on Friday morning.1

Financial Markets

1. Nasdaq Rises To Hit New All-Time High

The Nasdaq Composite soared to an all-time high on Friday, boosted by Mega Cap tech stocks. The tech-heavy index rose 0.7%, while the S&P 500 added 0.1%. The Dow Jones Industrial Average shed 208 points, or roughly 0.5%, meanwhile. Tech stocks boosted the market ahead of their upcoming earnings. Nvidia rallied about 0.7%, and shares of Meta, Amazon, Microsoft and Netflix were also higher. On the earnings front, HCA Healthcare lost 10% after reporting hurricane disruptions hit its quarterly earnings and full-year guidance, while Colgate-Palmolive shares shed 4% after the company reduced the low-end of its sales estimate for the year. Spirit Airlines shares soared after the low-cost carrier said it will cut jobs and has agreed to sell some planes. The 10-year Treasury yield notably cooled off from its three-month highs after breaking above the 4.25% mark during Wednesday’s session. On Friday, it traded around 4.21%.3

2. A More Profitable Tesla Is Still a Pricey Ride

Tesla’s third-quarter results gave the EV maker’s stock price a strong boost on Thursday, recovering the ground lost following the company’s disappointing Robotaxi event earlier this month. The reaction wasn’t entirely unwarranted: Tesla managed to surprise Wall Street by reversing the steady decline its automotive gross margins have suffered over the past two years. Strong growth in sales and gross profits in the company’s energy generation and storage segment also helped. Tesla’s total operating profit came in at $2.7 billion for the quarter—37% above Wall Street’s consensus forecast, according to FactSet.

Still, Tesla’s overall growth is far below normal, or at least what has long been the company’s version of normal. Total automotive revenue rising 2% year over year in the third quarter comes after two consecutive quarters of declines. That is also a fraction of the 45% growth Tesla’s core business averaged on a quarterly basis from 2020 through 2023. The world’s largest EV maker can’t escape the gravity of a global auto-sales slowdown. And even the profit boost might not be built to last. “Sustaining these margins in Q4, however, will be challenging, given the current economic environment,” said Tesla Chief Financial Officer Vaibhav Taneja on the company’s conference call on Wednesday. Analysts boosted their profit targets anyway. The consensus projection for Tesla’s per-share earnings over the next four quarters rose more than 5% following the company’s report. But even that doesn’t cover Tesla’s chunky valuation; Thursday’s jump of nearly 22% puts the stock price at around 83 times forward earnings. That is more than twice the multiple that Mega Cap tech giants such as Apple, Microsoft, and Amazon.com fetch.1

3. Southwest Airlines Profit Tops Estimates, Company Expects Higher Revenue in Fourth Quarter

Southwest Airlines’ third-quarter profit fell from a year ago but topped Wall Street estimates as the carrier worked to drum up revenue and fend off activist investor Elliott Investment Management. Elliott and Southwest struck a deal, announced Thursday, that averts a proxy fight and adds six of the activist’s candidates to the board. CEO Bob Jordan will keep his job as part of the deal. The Dallas-based carrier forecast unit revenue for the fourth quarter would increase 3.5% to 5.5% on a 4% drop in capacity compared with a year ago. It said costs, excluding fuel, would likely rise as much as 13%.

“Thus far in the quarter, travel demand remains healthy and bookings-to-date for the holiday season are strong, demonstrating the continued resilience of the leisure travel market,” Southwest said in an earnings release. Other carriers have pointed to strong travel demand to close out 2024 as airlines scale back unprofitable capacity that pushed down airfare. Separately, Southwest last month laid out a three-year plan that the company would add $4 billion to earnings before interest and taxes in 2027. The airline also said it authorized a $2.5 billion buyback and would slash underperforming flights from Atlanta to cut costs. Southwest said Thursday that it will repurchase $250 million of Southwest stock through an “accelerated” program under the overall buyback plan. The carrier is planning to abandon its longtime open seating to instead charge for seats as well as offer extra legroom options that come at a higher price, the biggest changes in its more than 50 years of flying.3

4. Mercedes-Benz Earnings Slump on Tough Economic Backdrop, Fierce Competition

Mercedes-Benz’s net profit halved in the third quarter as a tough economic backdrop and fierce competition in China hit earnings. The German luxury-car maker said Friday that profitability in its main cars business was weaker due to softer pricing and lower sales of its higher-margin cars. The division’s margin fell to 4.7% from 12.4% a year prior. “We are taking a prudent view about market evolution going forward and we will step up all efforts on further efficiency increases and cost improvements across the business,” Chief Financial Officer Harald Wilhelm said.

Speaking on a call with reporters, Wilhelm said the company seeks to reduce the cost base. This includes the materials that go into its cars and those it uses in factories, as well as labor costs. European automakers have been lowering their expectations for the year in recent weeks, citing intense competition with local manufacturers in China and lackluster demand for electric vehicles. An economic slowdown and property market slump have also seen Chinese buyers shy away from buying high-end cars. Manufacturers also face the prospect of an escalating trade war with China, as officials study measures such as raising tariffs on imported large-engine vehicles in retaliation to EU plans to slap tariffs of up to 45% on electric vehicles made in China. Cash flow has been a key concern for investors as they begin to question the sustainability of the company’s 40% dividend payout ratio amid its weaker performance and recent cut to cash flow guidance. The company’s guidance points to free cash flow from its industrial businesses significantly below the prior-year level of 11.32 billion euros ($12.26 billion), but it said Friday the figure edged higher to 2.39 billion euros in the third quarter from 2.35 billion euros in the same quarter last year.1

Sources:

(1) www.wsj.com

(2) www.bloomberg.com

(3) www.cnbc.com

(4) www.reuters.com

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