Earnings and Rates the Path of Least Resistance is Higher

Earnings and Rates the Path of Least Resistance is Higher

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Market Momentum Continues as Earnings and Fed Policy Drive Gains

The markets continue to provide investors with a positive dynamic, driven by a strong earnings season and a dovish shift in Federal Reserve policy. For the month of October, the S&P 500 gained 2.3%, the Nasdaq climbed 4.7%, and the Dow rose 2.5%. These monthly gains extended the S&P 500’s and Dow’s winning streaks to six consecutive months, the longest such run since 2018. The Nasdaq’s seven-month winning streak is its longest since August 2021. For the most recent week, the S&P 500 gained 0.7%, the Nasdaq was up 2.24%, and the Dow rose 0.75%. Have we finally reached the point of overvaluation in markets, as some pundits suggest? 

Are Stocks Overvalued—or Just Misunderstood?

Maybe pundits’ opinions are that markets are potentially overvalued; however, profit margins are near 13%, close to the higher end of historical levels. The earnings growth rate for the third quarter is now at 10.7%, compared to the 7.9% growth rate at the start of the quarter on September 30th. Those inputs and expectations for continued growth in the future have helped to support markets. Our CIO, Chuck Lieberman, recently noted that there is most certainly a bubble in talking about bubbles and that cash levels on the sidelines are exceptionally high, reflecting caution on the part of investors. These are not the signs of a bubble in stocks.

AI Stocks Lead Market Strength as the “Magnificent Seven” Continue to Shine

Artificial Intelligence-related stocks were highlighted during the latest week. They continue to show strength, with the “Magnificent Seven” names posting solid results for cloud services, AI adoption, and strong demand for new products, though some faced headwinds. A.I. investment has helped to drive growth in areas like datacenters, with buildouts currently accounting for 1% of GDP growth. 

Consumer Spending Splits: Higher-Income Resilience vs. Lower-Income Strain

Mixed results were seen in the consumer sector. Companies catering to the lower-end consumer have suffered, while those on the higher end of the income spectrum continue to show strength. This was highlighted by one of the best-run fast-casual restaurants, Chipotle Mexican Grill, which lowered its earnings, indicating that consumers making less than $100k per year are stretched and are eating more at home, opting against dining out. The higher-end consumer continues to show strength, as can be seen from one of the most discretionary purchases, airline flights. Currently TSA data on flights continue to post record levels. 

Fed Cuts Rates Again, Signaling a Gradual Policy Shift

In addition to strong earnings, the markets benefited from the Federal Reserve’s recent decision to cut the benchmark rate by 0.25 percentage points, setting the target range at 3.75% to 4.00%. This was the Fed’s second rate cut of the year. During a press conference, Chair Powell indicated that a December rate cut was not a certainty, despite market expectations for another reduction. He announced that the decision to pause or proceed would depend on future economic data, which is currently obscured by the ongoing government shutdown. The current move to cut rates was a solid step to support gradually cooling labor markets but must be balanced with the potential to reignite inflation. 

Trade Tensions Ease as Trump–Xi Meeting Boosts Market Confidence

Markets were also supported by the Trump-Xi meetings, which eased trade tensions through a partial truce, providing a sign of relief for investors. Key agreements included a reduction in some U.S. tariffs, a one-year pause on potential U.S. export controls, and the suspension of new port fees on Chinese ships. Additionally, China agreed to resume purchasing U.S. soybeans, which supported U.S. farmers.

“The U.S. economy remains well-positioned with strong corporate balance sheets, resilient consumers, and renewed investment at home.”

Gus Scacco, M.B.A.

U.S. Tariffs Under Review: Supreme Court Hearing Could Shape Trade Outlook

Over the short term, U.S. tariffs will be under the microscope as the Supreme Court listens to oral arguments scheduled for November 5, 2025. Legal experts expect that a decision could come by year-end 2025. Markets have not reacted negatively in spite of the potential of reversing the current U.S. tariff position. It appears investors are discounting the potential that the President could try to impose new tariffs under other existing statutes. 

U.S. Tariffs Under Review: Supreme Court Hearing Could Shape Trade Outlook

The U.S. economy continues to be in good shape, with corporate balance sheets well positioned, the overall consumer showing strength from the higher end, and low unemployment. The economy is also positioned for greater investment as companies reshore to the U.S., consumers benefitting from lower taxes, a reduction in regulation, and continued investment in the domestic markets. 

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.