What Happened Last Week
- Earnings Week Two: Earnings continue to come in strong. Autos, aerospace, and bank names were the brightest spots last week.
- Easing Regional Bank Fears: Concerns over credit quality at smaller banks and private lenders continue to abate.
- Trade Tensions Cooling: U.S. and China trade representatives made progress towards a deal over the weekend.
What We’re Watching This Week
- Earnings: This week is the “Super Bowl” of earnings, with five of the Mag-7 and just under half of the S&P 500 by market cap reporting.
- Fed Meeting: The fate of the Fed’s QT program is the biggest wildcard in this week’s expected 25 basis point (bp) rate cut.
- Trump – Xi Meeting: Trump and Xi are expected to meet in South Korea against elevated expectations for a trade breakthrough.
Investment Management Team’s Views
A cooler-than-expected inflation print and continued signs that the US and China are making progress on trade drove a risk-on equity rally last week. The S&P 500 closed at another new all-time high as concerns over regional banks and credit markets have faded substantially. Higher-beta parts of the market, such as small caps, mega-cap tech, and banks, were among the week’s better performers, while defensives like low volatility, dividends, and parts of developed international lagged the most. On trade, President Trump confirmed that he will meet with President Xi in South Korea later this week, their first in-person meeting since 2019. Readouts from this weekend’s talks with lower-level officials in Malaysia are raising expectations for a positive surprise at this meeting of principals. Markets would view lower tariffs, soybean purchases, and more carve-outs for technology and rare earths as a positive. Given the elevated expectations, a commitment to continued talks without anything concrete would be a disappointment.
Yields were little changed on the week as the market solidified expectations for a 25 bp cut by the Fed this Wednesday and another 25 bp reduction in December. We expect Powell to be down the middle and acknowledge the risk to both sides of the Fed’s mandate. An end to quantitative tightening (QT) seems likely this week as well. This would not be a surprise for bond investors, but equity markets may take it as a bullish sign to start the Santa rally early. The delayed inflation reading for September did little to move market expectations, as it contained a little bit for everyone—tariff impacts on imported goods, but a slowdown in shelter and rental inflation.
The week ahead is jam-packed. Five of the Magnificent 7 will report earnings, and with over 80% of companies in the index beating estimates so far this season, the bar is clearly a beat-and-raise. Investors will review the Mag-7 company reports for signs that AI capital expenditure trends remain strong, and for any returns on initial AI investments. Commentary from the hyperscalers will color expectations into the prints of major semiconductor companies in mid-November. A host of industrials, consumer names, and healthcare companies will report this week, even as the market is at the top. Industrial companies delivered strong results last week, but consumer reports showed mixed outcomes. With government data still suspended, this week’s reports will help investors flesh out views on consumption.