Equity Markets – Fewer Rate Cuts for 2025
The S&P 500 Index fell 3.5%, while the NASDAQ Composite slipped 3.2%. The Magnificent 7 performed relatively better, falling only 2.6%. Small caps fell 1.3% for the week while bonds were flat.
Federal Reserve Cuts Fed Funds Rate as Expected; Lowers Forecast for Number of Cuts in 2025
This week the Federal Reserve (Fed) cut the Fed Funds rate by 25 basis points as expected, back to levels not seen since December 2022. For 2025, the Fed also lowered the number of forecasted rate cuts from three to two, citing their adoption of a more cautious approach to the economy going forward.
Manufacturing Remains Weak While Retail Sales Remain Strong
Inflation remains sticky as the Producer Price Index for November came in slightly higher than expected. Food prices, particularly eggs, were a key contributor to the higher-than-expected results.
Domestic manufacturing continues in the doldrums as the Markit Purchasing Managers’ Index (PMI) for December came in at 48.3, below expectations and below the prior month. This reading indicates a contraction within manufacturing activity. The Markit PMI Services Index posted a higher-than-expected reading for December. Service activity, which represents approximately two-thirds of the economy, remains robust as the latest index reading is currently close to a three-year high.
Retail sales for November came in slightly higher-than-expected. As has been the case the last several months, sales of motor vehicles and electronics were strong, offsetting falling sales in restaurants. Monthly retail sales have seen growth for the majority of 2024.
Fourth Quarter Earnings Outlook Optimistic
With fourth quarter earnings season approaching, forecasts envisage another solid quarter of results. For the fourth quarter, analysts currently estimate year-over-year (YOY) earnings growth for the S&P 500 of 9.6%, slightly above the 9.1% YOY growth for the third quarter. The Financials and Communications Services sectors are projected to provide leadership regarding YOY earnings growth for the fourth quarter, while earnings growth for the Energy sector is expected to decline YOY as the price of oil continues to languish. For the calendar years 2024 and 2025, earnings are forecasted to grow YOY at 10.2% and 14.3%, respectively.
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Sources: BTC Capital Management, FactSet Research Systems Inc., Federal Open Market Committee (Federal Reserve) LSEG I/B/E/S, FTSE Russell (an LSEG Group company), S&P Global, U.S. Bureau of Labor Statistics, U.S. Census Bureau
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