Market Momentum: Your Weekly Financial Forecast & Market Prep

The past week in the U.S. financial markets can be characterized by significant developments in both the labor market and the equity markets, highlighting the interplay between macroeconomic conditions and investor sentiment. One of the focal points for investors continues to be the unemployment rate, which ticked lower to 4.1% in September, though it remains well above its April 2023 cycle low of 3.4%. While a gradual increase in unemployment might initially spark concerns about a weakening labor market, deeper analysis suggests a different narrative. The rise in unemployment has been driven by an increase in the labor force as more people reenter the job market, rather than a decline in employment levels. This influx of workers has created a temporary imbalance, with job growth lagging behind labor force growth. Despite this, the U.S. economy added 254,000 jobs in September, while initial jobless claims and layoffs remained at historically low levels, signaling continued stability in the labor market.

Wage growth has also played a critical role in this story, increasing by 4.0% year-over-year in September and marking the 17th consecutive month in which wage gains have outpaced inflation. This indicates sustained demand for labor, with approximately 8 million job openings across the U.S. Even with a higher unemployment rate than a year ago, these real wage gains provide a solid foundation for consumer spending, which is essential for maintaining economic momentum. The outlook for the U.S. economy remains cautiously optimistic as long as layoffs remain subdued and wage growth continues to support consumer activity.

At the same time, equity markets continue to navigate through a bull market that is now two years old. Since the market bottom in October 2022, U.S. large-cap stocks have rallied approximately 60%, a performance that is in line with historical averages for past bull markets. This has provided a strong tailwind for investor sentiment, even as growth appears to be moderating. Historically, most bull markets last for at least three years, and while the pace of gains may slow, the current environment suggests there is still room for upward momentum. Notably, geopolitical factors and the U.S. election cycle could introduce short-term volatility, but the broader market outlook remains supported by strong fundamentals.

Inflation data, which has been a key driver of both market sentiment and Federal Reserve policy, showed a slight uptick in September. This minor increase is not expected to derail the Fed's current course, with quarter-point rate cuts anticipated at each upcoming meeting until policy rates settle around 3% to 3.5%. Importantly, inflation has come down significantly from its June 2022 peak of 9.1%, with headline inflation currently at 2.4% and core inflation at 3.3%. This progress has enabled the Fed to begin easing monetary policy, which has been a positive catalyst for equity markets over the past year. The focus for the Fed has shifted from inflation control to supporting the labor market, a transition that should help extend the economic expansion.

Corporate earnings remain another critical factor in market performance. The third-quarter earnings season began last week, with several major U.S. banks reporting better-than-expected results, providing a positive start to the season. Earnings growth is forecasted to rise by 4.2% for the quarter, marking the fifth consecutive quarter of earnings increases. A key development to watch will be whether the earnings growth of the top-performing mega-cap tech stocks begins to moderate while other sectors of the market pick up the slack. A broader leadership rotation in earnings growth, with cyclicals and value-oriented stocks contributing more significantly, could provide the next leg of market support.

The resilience of the U.S. economy, driven by strong labor market dynamics and a robust earnings environment, has defied widespread expectations of a recession that were prevalent over the past two years. Despite facing headwinds such as high inflation and rising interest rates, the consumer remains a driving force in the economy, buoyed by healthy balance sheets and rising wages. This strength is evident in U.S. GDP growth, which has averaged around 3% over the past two years, and is projected to come in at 3.2% for the third quarter, according to estimates from the Atlanta Fed. However, growth is expected to slow in the coming quarters, likely returning to a more sustainable long-term trend of around 2%. While economic expansion may decelerate, the foundation for continued corporate profitability remains intact, and this should help sustain the bull market in the near to medium term.

Looking forward, there are several risks on the horizon that investors should be mindful of. Elevated valuations across U.S. equities limit the potential for further multiple expansion, meaning that earnings growth will have to do the heavy lifting if the market rally is to continue. Additionally, geopolitical tensions, particularly in the Middle East, and the upcoming U.S. election cycle could introduce bouts of volatility. That said, these risks are balanced by an environment of easing monetary policy and resilient corporate earnings, which should provide a cushion against any significant market pullback.

Interest rates have been another area of focus for market participants. The yield on the 10-year U.S. Treasury note climbed for the fourth consecutive week, closing at 4.08% on Friday, up from 3.98% the previous week. Rising yields reflect the market's reassessment of the pace of future rate cuts, particularly in light of higher-than-expected inflation readings. Despite this, the Fed remains committed to gradually lowering rates, which should provide ongoing support for equities as borrowing costs decline.

In terms of market breadth, the current rally appears to be healthy and widespread, with roughly 75% of S&P 500 components trading above their 200-day moving averages. Financials, industrials, and real estate have all seen solid gains, driven in part by rising yields and positive earnings surprises from the banking sector. Last week, shares of JPMorgan Chase and Wells Fargo rose sharply following their third-quarter earnings reports, which exceeded analyst expectations. This highlights the strength of the U.S. financial sector, even in a rising rate environment.

The U.S. consumer remains a key pillar of economic strength, supported by rising wages and excess savings accumulated during the pandemic. Retail sales data, which is expected to be released later this week, will provide further insight into the health of consumer demand. Recent reports have been positive, with sales rising modestly in August, and any continuation of this trend would bode well for fourth-quarter economic activity. However, consumer sentiment dipped slightly in October, according to the University of Michigan's Consumer Sentiment Index, which could be a signal that inflationary pressures are weighing on household confidence.

In summary, the U.S. financial markets have continued to build on the momentum of the past two years, with equity markets extending their recovery and the labor market remaining resilient despite some signs of cooling. Inflation has moderated significantly, allowing the Federal Reserve to begin easing monetary policy, which has provided a tailwind for stocks. Corporate earnings have continued to grow, and the market's leadership has started to broaden beyond the tech sector, signaling a healthier and more sustainable rally. While risks such as geopolitical tensions and elevated valuations remain, the overall outlook for the U.S. economy and financial markets remains positive, with strong fundamentals supporting continued growth into 2025.

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US Investor Sentiment

%Bull-Bear Spread

The %Bull-Bear Spread chart is a sentiment indicator that shows the difference between the percentage of bullish and bearish investors, often derived from surveys or sentiment data, such as the AAII (American Association of Individual Investors) sentiment survey. This spread tells investors about the prevailing mood in the market and can provide insights into market extremes and potential turning points.

1. Bullish or Bearish Sentiment:

   • When the spread is positive, it means more investors are bullish than bearish, indicating optimism about the market’s direction.

   • A negative spread indicates more bearish sentiment, meaning more investors expect the market to decline.

2. Contrarian Indicator:

   • The %Bull-Bear Spread is often used as a contrarian indicator. For example, extremely high levels of bullish sentiment might suggest that the market is overly optimistic and could be due for a correction.

   • Similarly, when bearish sentiment is extremely high, it might indicate that the market is overly pessimistic, and a rally could be on the horizon.

3. Market Extremes and Reversals:

   • Historically, extreme values of the spread (both positive and negative) can signal turning points in the market. A very high positive spread can signal market exuberance, while a very low or negative spread may indicate fear or capitulation.

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