Earnings Positive and the Fed on Pause
Key Takeaways
- Pause by Federal Reserve based upon stabilization of employment outlook.
- 2026 Economic outlook moves higher.
- Earnings Results average 8.2% growth.
The Federal Open Market Committee (FOMC) convened this week to determine the direction of U.S. monetary policy. By a 10-2 vote, the committee opted to keep the federal funds overnight borrowing rate unchanged at 3.75%.
Two dissenting votes were cast in favor of a rate reduction by two leading candidates to succeed current Chairperson Jerome Powell in May. A majority vote is required for policy changes, meaning any future chairperson would need an additional six to get a majority vote to implement a rate cut at their first meeting as Chairperson in June.
The consensus among the majority is that the U.S. economy is strengthening, employment is stabilizing, but inflation remains elevated. The decision for a “pause” follows 0.75% of rate cuts since September 2025 and provides time to collect further data, including fourth-quarter GDP figures, before the next meeting in six weeks.
Last week, the final reading of third-quarter real GDP was revised upward to a 4.4% growth rate, surpassing the initial estimate of 4.3%. This positive adjustment follows a two-week period of consistently strong economic data, as evidenced by the Citi Economic Surprise Index reaching 28.5—its second-highest level in the past 12 months. Driven by this sustained momentum, economists have raised their real GDP growth projections for the fourth quarter from 2.0% to 2.2% and full-year 2026 from 2.0% to 2.4%.
A positive indicator for future economic growth was a recent release revealing an impressive 4.9% annualized increase in labor productivity for the third quarter, alongside a revised 4.1% growth rate for the second quarter of 2025. Higher productivity is a key economic driver for controlling costs by pushing down per unit labor cost and creates a pathway for future wage increases.
FactSet data for the fourth quarter of 2025, which is currently being reported, shows 75% of S&P 500 companies have reported a positive earnings-per-share (EPS) surprise with a blended earnings growth rate of 8.2%. If the 8.2% growth rate holds for the quarter, it will mark the 10th consecutive quarter of year-over-year earnings growth for the S&P 500 index.
The S&P 500 reached a new high as it advanced 0.9% this past week, reaching a 2.0% year-to-date (YTD) return after continuing its recovery following last week’s drawdown. Up 7.0% this year, small capitalization stocks continue to lead domestic markets with overseas developed market close behind up 6.8%.
Bond prices were largely unchanged this week, with the 10-year U.S. Treasury yield holding steady around 4.25%. Bonds have posted a 0.3% YTD return primarily from collecting coupon income.
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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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