Ambiguity is still the main theme for markets today.
Earnings season is over, with companies growing earnings by about 13% over this time last year. Those are very solid earnings, yet we’ve seen markets trade mostly sideways. This is largely due to the underlying economic data, which has been getting progressively worse. Consumer confidence, business indexes, inflation, and unemployment have all sapped investor confidence.
This week we see important data on personal expenditures, consumer debt, and data on the health of the services sector. Early indications of black Friday retail sales were positive, but whether that momentum is maintained into the end of the year remains to be seen.
The Federal Reserve meeting is approaching with the FOMC somewhat divided over whether to continue the path of interest rate cuts into the end of the year. Chair Powell has indicated that the data they see is murky with the risks of inflation still lingering, yet several committee members have indicated they want to continue cutting. Markets see a 90%+ chance that the Fed cuts at their December meeting — a change to that expectation could push markets around quite strongly.
Overall, I am still cautious. The underlying economic data has worsened despite strong corporate earnings. That said, a rally into the end of the year would be a normal seasonal occurance, so we do have that tailwind for markets. 2026, however, may get interesting very quickly.
Chart of the Week
One challenge over the past month and a half has been the delay in data releases (or their outright cancellation). Corporate earnings, therefore, have taken on a more important role than normal. Looking more closely at corporate earnings we see that, despite strong earnings growth, the US stock market is more expensive than about 90% of its history. That should give investors pause about future returns as high valuations tend to foretell lower future returns over 3-, 5-, and 10-year periods.
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