Stocks Rally to Record Highs on Favorable US CPI Report

US equities, with the S&P 500 and Nasdaq 100 reaching new record highs, rallied on Friday, primarily driven by a slightly weaker-than-expected CPI report that bolstered expectations for a Fed rate cut, alongside stronger-than-forecast manufacturing and services PMI data. This positive momentum was reinforced by a robust earnings season, where 85% of S&P 500 companies surpassed forecasts despite a projected slowdown in Q3 profit growth. However, market optimism was tempered by declining consumer sentiment, escalating trade tensions following President Trump's termination of Canada talks and renewed China tariff threats, and the ongoing government shutdown delaying key economic reports, while the bond market priced in a 97% probability of a 25bp Fed rate cut next week.

Analysis

US equity markets, specifically the S&P 500 and Nasdaq 100, achieved new record highs on Friday, driven by a confluence of factors. A slightly weaker-than-expected September CPI report, showing +0.3% m/m and +3.0% y/y, fueled expectations for a Federal Reserve rate cut, with markets pricing in a 97% chance of a 25 basis point reduction next week. This dovetailed with stronger-than-anticipated October S&P US manufacturing and services PMI data, which registered 52.2 and 55.2 respectively, both exceeding forecasts.

However, underlying concerns persist, including the September CPI's 16-month high and its continued distance from the Fed's 2.0% target. Consumer sentiment weakened, with the University of Michigan index falling to 53.6, below expectations. Geopolitical risks also intensified as President Trump terminated trade negotiations with Canada and reiterated threats of increased tariffs on Chinese goods if a deal isn't reached by November 1, while the ongoing government shutdown continues to delay key economic data and could impact employment.

The Q3 earnings season has been largely positive, with 85% of S&P 500 companies beating forecasts, marking the best quarter since 2021. Despite this, overall Q3 profit growth is projected at +7.2% y/y, the smallest increase in two years, and sales growth is slowing to +5.9% y/y. Sector-specific movements included strong gains in chip stocks like AMD (+7%) and Micron (+5%), and Ford (+12%) on positive earnings, while Tesla (-3.4%), Newmont (-6%), and Deckers Outdoor (-15%) saw declines due to company-specific outlooks.

Key Decisions for Investors

• Investors should closely monitor upcoming Fed communications for confirmation of rate cut expectations, as current market pricing appears aggressive given persistent inflation above target.
• Evaluate portfolio exposure to trade-sensitive sectors and companies, considering the escalating trade tensions with Canada and China, which could introduce significant volatility.
• Assess individual company fundamentals and guidance within the Q3 earnings season, prioritizing firms demonstrating resilient growth prospects amidst a broader slowdown in aggregate profit and sales growth.