All Eyes On The Fed

Markets moved higher for the 2nd consecutive week. Corporate earnings for the 3rd quarter continue to out-perform. Of the 29% of S&P 500 companies that have reported thus far, 87% have reported earnings above estimates and 83% reported revenues

above estimates. Meanwhile, it's been a tough year for investors that trusted the soft data instead of the hard data. The Hard Data has showed a stable economic picture, while the soft data warned of impending doom. U.S. GDP grew at +3.8% in the 2nd quarter, is projected to come in at +3.9% in the 3rd quarter, and according to the Fed, looks to be higher than 2% in the 4th quarter. At one point in May, the survey data collected by the University of Michigan showed that consumers expected year-over-year inflation to reach +6.6%. In fact, the Consumer Price Index has just now reached +3% in 2025. The forecast for September CPI (delayed due to the government shutdown), was +0.4%, but the number came in at +0.3%. The year-over-year expectation was for +3.1%, but came in at +3.0%. While the consumer sentiment measure has been largely lower in 2025, Retail Sales and Redbook Sales have continued to show a strong consumer. Actual spending has remained above average, with little-to-no resemblance to recessionary periods of low or negative spending.

Earnings surprises so far for the 3rd quarter are coming in at higher levels not seen in 4 years. To date, there has never been an earnings-led "bubble." Higher earnings mean

that consumers are spending, which the means GDP will continue to expand. When discretionary stocks are compared to defensive stocks or staples, it provides a picture of how investors are positioning their money. As defensive stocks out-perform discretionary stocks, it tends to be a signal of weakness in the markets and perhaps the economy. Currently, discretionary stocks are out-pacing staples which means the bullish case is still strong.

There are some cracks in the credit markets - specifically private credit. So far, the majority of the damage has been in the regional bank space. However, several

large banks - JPM, Bank of America, and Wells Fargo, have lent money to private debt firms in the billions. The "credit" element of the Chicago Fed's National Financial Conditions Index - including more than 30 financial indicators - is below zero at -0.08. In previous recessions, this subindex rose above 0.2 and even hit that mark during the Regional Bank Crisis in 2023. While a Fed rate cut this week is all but certain, investors will be paying close attention to Powell's comments regarding regional banks and credit markets.

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