U.S. Equities Rebound on Strong Earnings and Economic Growth

After a turbulent start to the year, U.S. equity returns saw a significant rebound in the third quarter. In this market review, corporate earnings were strong, and U.S. economic growth remained solid, helping U.S. stocks reach new record highs. The technology sector, in particular, drove the rally, with Apple making history by becoming the first company to achieve a market capitalization of $1 trillion. This quarter also marked the longest bull market in history, surpassing the previous record set between 1990 and 2000.

However, markets outside the U.S. were generally flat or down, with investor concerns over worsening global trade relations and the strength of the U.S. dollar. Emerging markets, in particular, faced difficulties, with a combination of a stronger dollar, financial issues in Turkey, and uncertainties surrounding China’s trade disputes with the U.S.

Risks and Uncertainty Ahead for the Fourth Quarter

Looking ahead, the fourth quarter brings significant risks to the market review. Trade tensions remain a major concern, and it’s uncertain how much further these tensions will escalate, or what impact they will have on trade, corporate profits, inflation, and economic growth. In the U.S., wage pressures are beginning to rise, which has contributed to a more aggressive outlook from the Federal Reserve, leading to higher interest rates. In September, the Fed raised policy rates for the eighth time in this cycle, causing short-term rates to rise and the yield curve to flatten. However, the curve remains steep relative to previous cycles, and U.S. credit and financial conditions have not yet shown significant tightening.

Market Sentiment and Expectations for Earnings

The fourth quarter will be filled with market speculation, especially around the upcoming mid-term elections and their potential impact on the market review. Market pundits have historically struggled to predict market moves based on politics, and this trend is likely to continue. As earnings season begins and third-quarter GDP is reported, growth should remain strong, and the Fed may raise rates again in December. However, with the impact of corporate tax cuts on earnings starting to fade, the bar for earnings to surprise on the upside is now quite high. Slowing earnings growth may erode some of the support for U.S. market outperformance compared to other regions. Despite this, markets have continued to disregard bad news, as investors have become accustomed to buying on negative headlines. As long as this dynamic persists, we expect any market corrections to remain relatively shallow and be seen as “noise.”

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