• As expected, the Fed cut rates last week, and updated policy language suggests a pause in cuts.
• Third quarter corporate earnings results continue to beat estimates, with the majority of reporting companies exceeding expectations.
• Any signs of improving global growth would likely extend the recent risk-on climate at least through the end of the year.

Equities finished higher for the fourth straight week, with the S&P 500 Index up 1.5% and most U.S. averages setting record highs.1 The biggest tailwinds included the de-escalation of U.S./China trade tensions, Fed accommodation, and earnings results that have not been as bad as expected. Health care, technology and industrials were the best-performing sectors for the week, while REITs, energy and consumer staples were the weakest.1

Weekly Top Themes

1. The payroll employment report was better than expected, and while job growth has slowed, it is nowhere near recession-like readings. These releases are bearish for Treasuries and suggest acceptable growth without inflation. The unemployment rate edged up to 3.6%, with average hourly earnings up 0.2% for the month and 3.0% year over year.2

2. Third quarter real GDP confirms a slowdown in U.S. economic growth. Real GDP advanced 1.9% in the third quarter, putting the year-over-year gain at 2.0%, down from 3.1% in 2018.3 The outcome was better than expected, with most of the upside surprise coming from stronger-than-expected inventory accumulation.

3. As widely expected, the Fed cut interest rates for the third time this year. A change to the key policy language suggests that the Fed is likely on hold for an indefinite period. Importantly, the yield curve is no longer inverted.

4. With about three quarters of S&P 500 companies reporting, earnings are beating estimates by 4.7%, with 70% of companies exceeding estimates.4 Earnings per share are on pace to gain 1% for the third quarter, with health care posting the strongest performance.4

5. Negotiations on phase one of a U.S./China trade deal should remain on track, despite the cancellation of this month’s Asia-Pacific Economic Cooperation summit. A broader phase-two deal in which the U.S. rolls back tariffs in exchange for significant Chinese concessions looks highly unlikely.

6. The House of Representatives formally launched an impeachment probe against President Trump. We believe the House is likely to vote to impeach President Trump, but see little chance the Senate will convict him. Regardless, we think the uncertainty may contribute to market volatility.

7. The S&P 500 was up 2.0% in October, bringing the year-to-date gain to 24%, marking the best year-to-date gain since 2013 and the 14th best since 1930.1 Since August 2018, the Institute for Supply Management (ISM) manufacturing index has fallen from 60.8 to 47.8, driven by weakening economic and trade issues.5 Typically, the ISM manufacturing index falls below 45 during or before recession.5 An upturn in global economic momentum is key to a sustained rally.

A Near-Term Recession Looks Unlikely

Capital markets have embraced a less-bearish outlook for the global economy in recent weeks, with global equities reaching a 20-month high in most places and an all-time high in the U.S.1 The liquidity backdrop has improved, political uncertainty should recede, China should move from a headwind to a modest tailwind and a weakening dollar will indicate that the world is healing, helping ease global financial conditions. In this environment, we believe stocks are likely to outperform bonds barring a recession. This environment also favors cyclical stocks over defensive stocks and potentially international markets over the U.S. in the near term.

The recalibration of growth expectations is consistent with an upbeat view of the global economy. And while manufacturing and trade are weak, consumer and service data have been more resilient and indicate an ongoing, albeit slowing, global expansion. Any signs that global growth conditions can improve would likely extend the recent risk-on climate at least through the end of the year.

Will renewed global growth be strong enough to foster increased corporate earnings and push bond yields higher? We expect the economic expansion to continue, but see little to indicate a robust rebound in activity and profits over the next year. Capital spending growth will improve modestly, thus restraining the typical beta of trade in capital goods. In turn, a subdued recovery and global trade would temper any improvement in corporate profits. Beyond the near term, policy uncertainty associated with the impeachment of a president and next year’s elections remain in focus. Although equity markets tend to do well during election years, there is high potential for turbulence. While economic activity is more likely to firm than to slump, a middling rebound in corporate profits – combined with persistent U.S. political uncertainty – argues for maintaining a neutral equity weighting over the intermediate term.

Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen.

1 Source: FactSet, Morningstar Direct and Bloomberg

2 Source: Bureau of Labor Statistics

3 Source: Bureau of Economic Analysis

4 Source: Credit Suisse Research
5 Source: Markit Economics