Stocks See Support from Favorable CPI Report

US equity markets advanced today, with the S&P 500, Dow, and Nasdaq all trading higher, primarily fueled by a slightly weaker-than-expected September CPI report that increased market expectations for a Fed rate cut, now 97% priced for the upcoming FOMC meeting. This positive momentum was further supported by stronger-than-anticipated October S&P US manufacturing and services PMI data. However, gains were partially offset by a decline in consumer sentiment, President Trump's termination of Canada trade talks, ongoing US-China trade tensions, and the persistent US government shutdown. While Q3 earnings season has seen 85% of S&P 500 companies surpass forecasts, overall profit growth is the smallest in two years, with tech stocks broadly strong, led by chipmakers and most of the Magnificent Seven, alongside significant individual stock movements like Ford's rally and declines in Newmont and Deckers Outdoor.

Analysis

US equity markets, including the S&P 500, Dow, and Nasdaq 100, advanced today, driven primarily by a slightly weaker-than-expected September CPI report. The headline CPI rose +0.3% m/m and +3.0% y/y, while core CPI increased +0.3% m/m and +3.1% y/y, both marginally below market forecasts. This data has significantly bolstered expectations for a Federal Reserve rate cut, with markets now pricing in a 97% probability of a 25 basis point reduction at the upcoming FOMC meeting. Despite this, the 3.0% y/y CPI remains at a 16-month high and well above the Fed's 2.0% target, indicating persistent inflationary pressures.

Further economic data presented a mixed picture, with October S&P US manufacturing PMI rising to 52.2 and services PMI to 55.2, both exceeding expectations and providing market support. Conversely, the final-October University of Michigan US consumer sentiment index declined to 53.6, falling short of forecasts. Geopolitical and domestic policy uncertainties also weigh on sentiment, including President Trump's termination of trade talks with Canada, ongoing US-China trade tensions ahead of a potential tariff escalation, and the protracted US government shutdown, which is delaying key economic reports and could lead to increased unemployment.

The Q3 earnings season continues to show resilience, with 85% of S&P 500 companies beating forecasts, marking the best quarter since 2021. However, the projected +7.2% y/y profit growth represents the smallest increase in two years, and sales growth is expected to decelerate to +5.9% y/y. Sectorally, technology stocks, particularly chipmakers like AMD (+6%) and Micron (+4%), along with most of the Magnificent Seven (e.g., Alphabet +2.8%), showed strong performance. Conversely, individual stocks like Newmont (-4%) and Deckers Outdoor (-12%) faced significant declines due to specific company outlooks.

Key Decisions for Investors

• Monitor upcoming Federal Reserve communications closely for any shifts in rate cut expectations, given the persistent inflation despite a slightly weaker CPI report.
• Evaluate portfolio exposure to sectors sensitive to trade policy and government stability, as ongoing trade tensions and the government shutdown present significant macro risks.
• Focus on companies with strong fundamental earnings performance and clear guidance, particularly within resilient sectors like technology, while exercising caution with those showing decelerating growth or negative outlooks.