CNR Speedometers^®

Equity markets have staged an impressive comeback since falling in early August. From the market low on August 5, the S&P 500 is up 8% and about 1% below its all-time high. We think several developments have helped restore an upbeat feel across markets.

On the macro side, the economy is growing, and inflation continues to slow with consumer and producer prices coming in softer than expected for the month of July. Spending data has also shown the U.S. consumer is still very active. The primary concern lately has been the job market, but we continue to believe it's cooling from its blistering pace, not accelerating the high levels of unemployment.

Earnings season is also wrapping up with mostly positive results. S&P 500 earnings growth is tracking at 11% — that’s up from expectations of 9%. Sales growth in consumer-facing companies continues to advance, and real income growth is positive across the country.

But there are some caveats to the numbers.

Companies are reporting earnings that are about 3.5% above estimates and below the five-year average. Top-line revenue performance is also below average, and there have been some concerns about the torrid pace of earnings in tech, which are likely to decline over the coming quarters.

Overall, this is the first time since 2022 that stocks outside the Magnificent 7 have produced positive earnings, and we do think this will continue to power the market from here. But even with some of this positive momentum, the next two months’ stretch will lead us to the November election, and such periods have historically been challenging for stocks, with bigger daily fluctuations and lower returns. If we add in a source of volatility from a close presidential race and the current situations in international conflict zones, and there could be some major moves from the market in either direction, and investors do need to be prepared for that.

However, the fundamental backdrop is in good shape, and we have made four improvements to our Speedometers^® this month.

Dial 1: Monetary Policy, 2:14— Our Monetary Policy dial is moving into the green zone. In Jackson Hole, Federal Reserve Chair Powell gave his clearest signal yet that it is time to ease policy, and we expect the first cut at the next meeting in September, followed by more easing later in the year. The conditions this time around for rate cuts are somewhat unique — the Fed is not responding to a collapsing economy or challenges within the financial system.

We think the upcoming rate cuts are more about letting off the brake than about hitting the gas, and so we do expect this cycle to be gradual. The cuts are not going to immediately result in 3% mortgage rates or deliver a heavy dose of liquidity, but they will represent a step toward lower borrowing costs for consumers and businesses.

Dial 2: Interest Rates, 2:56— We've also made some positive changes to our Yield Curve and Interest Rate dials, but they're still neutral overall. Long-term interest rates are likely to remain elevated, and rates are not expected to return to the low levels of the pre-pandemic era.

Dial 3: Yield Curve, 3:10— We also believe the shape of the Yield Curve should become less negative, with solid growth and lower short-term rates easing the inversion.

The final Speedometer^® change was an improvement in our Business Outlook.

Dial 4: Business Outlook Spending/Surveys, 3:23— Business owners have been hesitant to start new projects ahead of the U.S. election, and we believe we’ll see a flurry of corporate spending once the new president is in the White House.

In addition, federally funded infrastructure projects, which received a boost under the bipartisan infrastructure bill, are going to help keep business spending up. Over the last 40 years, stocks have generally performed well after a first Fed rate cut, but it’s important to keep in mind that further market volatility in the months ahead is possible, especially as we approach Election Day. The environment can change quickly, but growth is still healthy, corporate America is performing well, and the Fed is about to cut interest rates. All of this leads us to believe the market is on a sturdy foundation.