After the Federal Reserve's September interest rate meeting, the US stock market has achieved a four-day consecutive weekly increase. The shift in monetary policy has boosted market risk appetite, while new signs of a strong labor market have eased concerns about an economic recession, leading to a decline in expectations of aggressive interest rate cuts.
In the coming week, the impact of geopolitical factors cannot be ignored, and inflation and earnings season will become key factors affecting market trends.
US soft landing prospects strengthen
The resilience of the US economy once again makes the prospect of a soft landing even brighter.
As the most closely watched indicator last week, the US Department of Labor reported that the US added 250000 new jobs in September, far exceeding market expectations, and the employment growth in August and July was also revised upwards. The previously worrying unemployment rate has dropped from 4.2% to 4.1%.
In addition, the latest Job Vacancies and Labor Mobility Survey (JOLTS) shows that job vacancies in the United States rose to a three-month high of 8.04 million in August. The recruitment rate has dropped to 3.3%, remaining at its lowest level since 2013, excluding data from the early stages of the 2020 pandemic. The service industry, as the backbone of the economy, is growing at its fastest pace in a year and a half, with the Institute for Supply Management's (ISM) Service Industry Index climbing to 54.9% in September, the highest level since February 2023.
Bob Schwartz, Senior Economist at Oxford Economics, stated in an interview with First Financial News that the September employment report was far better than expected, with wage growth accelerating. On the other hand, he believes that the strong ISM service sector index is another signal that the economy is still rapidly expanding. "Consumer spending continues to grow at a strong pace, and with the relaxation of the financial environment, it should receive good support this year and next. Once political uncertainty subsides, there is still a lot of room for improvement
The pricing of interest rates has changed, and the yield of medium and long-term US Treasury bonds has risen strongly. The 2-year US Treasury bond, which is closely related to interest rate expectations, rose 36.7 basis points to 3.93% for the week, the largest increase in 16 months. The benchmark 10-year US Treasury bond rose 22.9 basis points to 3.98% for the week. According to data from the Chicago Mercantile Exchange's Fed Watch, the likelihood of a 25 basis point rate cut in November has risen to nearly 90%.
Barclays believes that the latest non farm payroll report undermines the view that external labor demand is losing momentum, strengthening the sustained resilience of economic activity and the possibility of a soft landing. The bank expects the Federal Reserve to cut interest rates by 25 basis points at its policy meetings in November and December this year.
It is worth noting that Federal Reserve Chairman Powell also cooled down aggressive easing in his latest speech last week. Overall, the economic situation is good, and we plan to use our tools to keep it there. If the economy develops as expected, we will make two more cuts by the end of the year, totaling 50 basis points, "he said.
Schwartz told First Financial that given the Federal Reserve's focus on the labor market when considering future interest rate cuts, strikes will cause confusion in employment data and may complicate its decisions. However, the overall impact is temporary, as the labor market and economy are healthy enough to support a 25 basis point rate cut at the November meeting.
Market sentiment remains optimistic
The US stock market has continued its rebound since mid September. As of last Friday's close, the Dow Jones Industrial Average set its 34th closing record for the year. The S&P 500 index is less than 1% away from a historic high.
Dow Jones market statistics show that there was some differentiation in various industries last week. The sharp rise in crude oil futures pushed up the energy sector by 7%, followed by a 2.2% increase in communication services. Public utilities and finance, industrial and technology stocks rose, while the leading raw materials and real estate sectors led the decline in the previous week. The technology sector has received attention, with OpenAI announcing a new round of funding of $6.6 billion, with a post investment valuation of $157 billion. Several institutions have raised Meta's target price.
In terms of market sentiment, Bank of America's cross asset bull market indicator, which quantifies investor sentiment through fund flow, position data, and market technology, rose from 5.4 to 6, the largest weekly increase since December 2023, indicating that investor sentiment remains optimistic. The bank stated that this is due to strong inflows of emerging market stocks and strong performance of technical indicators in the credit market.
According to the schedule, the third quarter financial report of the US stock market is expected to officially start next week, with JPMorgan Chase, Wells Fargo, and BlackRock taking the lead.
Goldman Sachs' Chief US Equity Strategist David Kostin released a report stating that the expected earnings per share for the S&P 500 index in 2025 have been raised from $256 to $268, an 11% increase from the previous year. Considering the expectation of profit growth in 2025, the 12-month target level for the S&P 500 index has been raised from 6000 points to 6300 points.
Jiaxin Wealth Management wrote in its market outlook that last week, the US stock market was hit by the situation in the Middle East and strikes at ports on the East Coast. It should be noted that recent developments have a potential impact on future inflation, which may translate into higher prices, making the Federal Reserve's work more complex and resulting in higher market volatility. At present, inflation data has been moving towards the Federal Reserve's target, the economic foundation is stable, and market participants seem to agree with the Fed's slowing pace of easing.
The institution believes that there are many potential market driving factors in the coming week, such as monthly inflation data (consumer price index on the 10th, industrial producer price index on the 11th) and the third quarter earnings season. The stronger than expected US economic data seems to be the main driving force behind the recent trend of the stock market, which is expected to further boost the market. However, according to the information obtained at the Barclays Global Financial Services Conference in September, a cautious attitude is taken towards the profit reports of large banks. It is worth mentioning that FactSet currently predicts a profit growth of 4.6% for the S&P 500 index in the third quarter, lower than the 7.8% at the beginning of this quarter.