Good morning,

Global equity and bond markets have started the month of November on a bit of a better note compared to the past few months. The U.S. Federal Reserve held interest rates steady in its policy update this past week, following in the path of a few other major central banks. This comes as a relief. Since August, higher yields, falling stock prices, and dollar strength have fueled starkly tighter financial conditions – in fact, to some of the tightest levels of the past year, even though the Fed has only raised rates once in the past six months. Policymakers highlighted tightening financial conditions in their policy statement. This comes at a time when Fed officials largely believe that rate hikes to this point are only just beginning to bite on economic activity. Tightening financial conditions also act with a lag on the economy, with those two factors potentially acting as a double headwind. Fed Chair Jerome Powell struck a more cautious tone than he has in some time, likely as a result. We maintain our view that the Fed is done with rate hikes, but now with only greater conviction. Given this optimism, the S&P 500 has gained 4.7 percent since Oct. 27, while the 10-year Treasury note yield has now fallen around 32 basis points from the October high to 4.67 percent

The general message from policy makers has been consistent: they are trying to balance the risk of over-tightening financial conditions with the need to ensure policy is sufficiently restrictive for long enough to bring inflation sustainably under control. Below, we share some takeaways from the third quarter earnings season which is well more than halfway complete.

Overall, corporate earnings results have been fine, particularly when compared to expectations that remain cautious. The better-than-expected U.S. earnings results come on the heels of similarly better-than-expected U.S. economic data. The most recent U.S. GDP figures, which represent the most common measure of economic growth, grew at an annualized pace of nearly 5% for the July-through-September period. That was not only higher than expected but represented the highest rate of quarterly growth since late 2021. The strength was driven by an ever-resilient consumer, which continues to surprise to the upside. It’s worth noting the data hasn’t been as inspiring on the Canadian side, where comparable GDP figures have been weaker.

Despite positive headlines around the U.S. economy and corporate earnings results, the overall tone of the outlooks and commentary from management teams has been more guarded. This reflects the concern that businesses have over the elevated level of uncertainty with respect to the future path of the economy given high borrowing costs, inflation pressures, geopolitical risks, and pressures in some foreign markets like China and even Europe to some extent. Many businesses acknowledged that the U.S. economy, and the consumer in particular, have been stronger than expected. But many questioned whether, or more accurately, how long, the consumer resilience could be sustained.

Some potential cracks on the consumer front have started to emerge, with delinquencies trending higher in areas like credit cards and auto loans. Nevertheless, banks continue to characterize the latter increases as being a normalization of credit trends, rather than anything particularly troubling. Meanwhile, the labor backdrop remains healthy but changes are occurring at the margin, with management teams through this past earnings season commenting on the lower levels of employee turnover and slower pace of hiring. Several companies have intensified their focus on costs and have reduced their capital spending plans as a result.

The actions noted above may be music to the ears of central banks. After all, they raised rates aggressively and quickly over the past year or so in an effort to slow inflation pressures and cool economic activity. Businesses seem to increasingly be doing their part by adapting to the environment. On the other hands, U.S. consumers seem to largely be undeterred by higher rates and the higher cost of living to this point. Nevertheless, it may just be a matter of time before they too start to adjust their behavior in a bigger way by slowing their own spending plans, leading to weaker demand for goods and services. Admittedly, this view may continue to require some patience to see it play out.

Please continue to call us as our entire team stands ready to listen and speak with you. We can also be made available to speak with any family members or friends who may need reassurance during these times.

Have a great weekend,

Devin