Daily market snapshot

• Markets finish mostly higher: Markets in the U.S. and Canada were mostly higher, with the TSX and Dow posting modest gains while the Nasdaq and S&P 500 were roughly flat. This comes as retail sales in the U.S. surprised to the upside for the month of September. Meanwhile, Treasury yields continued to climb higher as well. The 10-year U.S. Treasury yield climbed about 0.08% to 4.1%, close to its highs of the month*. The combination of better-than-expected economic data and inflation that came in slightly above expectations last month has likely put some upward pressure on yields in recent weeks.
• The U.S. consumer remains resilient: The economic data continues to point to a U.S. consumer that remains resilient. On Thursday morning, retail sales came in above expectations for the month of September, at 0.4% month-over-month versus forecasts of 0.3% and last month's 0.1%. Excluding auto sales, retail sales came in at 0.5%, well above forecasts of 0.1%*. In addition to a strong retail-sales report, the October Philadelphia Fed index, an indicator of business conditions in the region, saw a notable jump to 10.3, also above forecasts of 3.0 and last month's 1.7 reading*. Together, the robust retail sales report and strong Philly Fed index points to a U.S. economy that continues to grow at or above trend levels. In fact, the Fed's own GDP-Now forecast shows 3.2% annualized growth for the third quarter*. In our view, the backdrop for financial markets remains healthy, given a Fed that is poised to continue its rate-cutting cycle combined with an economy that is on track for a "soft landing," or no recession.
• Third-quarter earnings deliver so far: About 13% of S&P 500 companies have reported earnings thus far for the third quarter of 2024. Of these, about 75% have beat earnings expectations, in line with historical averages*. The sectors that have had the biggest upside surprises in earnings this quarter have been financial services companies and consumer discretionary companies, which have been reflected in better performance coming from these sectors as well. More broadly, expectations remain for earnings for the full-year 2024 to grow by about 9%, while 2025 earnings are expected to grow by around 15%*. In our view, while it is early days still, there is a case to be made for double-digit earnings expansion in 2025, given interest rates are likely to be lower, which should support better consumption for both households and corporations.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

Wednesday, 10/16/2024 p.m.

• Markets close higher: In a quiet session during which markets spent most of the day little changed, some late-day momentum pushed the major equity indexes to a positive close on Wednesday. Stocks have seesawed so far this week, hitting new highs on Monday (the TSX was closed), followed by a lower close yesterday, as investors continue to process the recent reads on inflation and jobs. While there was little direction today coming from any headline news or data, corporate earnings results are the primary driver this week, with the big U.S. banks getting the quarter's announcements started on a reasonably positive note. The spotlight will swing brightly toward the September U.S. retail-sales report due out Thursday morning. With market gains this year pricing in the expectation for a soft landing (continued economic growth alongside moderating inflation), this check on the health of the consumer will add some color to the economic picture ahead. With the labour market softening but still in decent shape, we think consumer spending can hold up fairly well heading through the holiday shopping season. This, accompanied by some additional relief on inflation (particularly shelter prices), should allow central banks to pursue further rate cuts in the months ahead, including another cut from the Bank of Canada next week.
   
• Markets reflect a mix of themes: Looking across markets, bonds were slightly firmer today, pushing interest rates modestly lower, as the 10-year Government of Canada bond yield settled near 3.1%. Encouraging inflation readings from the U.K. on Wednesday and Canada on Tuesday have helped ease rates following their jump in October, as fixed-income markets adjusted expectations for Fed rate cuts. Commodities were mixed, with gold higher (sitting just a shade below all-time highs) while oil prices fell slightly following Tuesday's sharp decline, as fears of attacks on Middle East oil facilities have eased. Oil prices are down more than 8% since the start of last week and are more than 15% lower since early July. Looking under the hood of the equity markets, the financial services, utilities and real estate sectors were leaders today, reflecting a balance of cyclical and defensive tilts. Market sentiment overall remains positive (as signaled by valuations and sentiment surveys), with today's modest move appearing to us as a reasonable posture as equities catch their breath amid the recent healthy climb.*
   
• A check on the rally: Speaking of that healthy climb, Canadian (TSX) and U.S. (S&P 500) large-cap stocks are up 5% in just the last five weeks and more than 11% since early August. This brings the year-to-date gain to 22% for the S&P 500 and 17% for the TSX. Growth investments have been the most notable fuel source, with technology (+32%) and communication services (+29%) leading the way. But utilities (+27%), financials (+25%), industrials (+21%), and consumer staples (+16%) have also delivered strong performance this year, reflecting a broadening out of the bull market with outperformance of cyclical and defensive sectors in recent months. Real estate (+10%) and energy (+8%) have been the laggards. Value has markedly outperformed growth over the last three months, while mid- and small-caps have outpaced large-caps during that period, benefiting diversified portfolios.**

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet **S&P 500 GICs Level 1 sector indexes, year-to-date performance through 10/15/24.}

• Stocks close lower: The TSX and major U.S. equity markets traded lower on Tuesday, retreating from record highs for the TSX and S&P 500. Sector performance was mixed, as real estate and consumer staples stocks posted the largest gains. In global markets, China stocks fell on weak trade data for September, with both exports and imports missing estimates*. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil was down on forecasts for slowing demand**, while gold traded higher.
   
• Corporate earnings season ramping up: Though early in the season, third-quarter corporate earnings are off to a solid start relative to expectations. Of companies that have reported, 80% have beaten analyst estimates, with an average upside surprise of 7.3%*. Earnings growth is expected to be broad, with nine of the 11 sectors forecast to report higher earnings year-over-year*. We believe the broadening of earnings performance should support the continued rotation of market leadership away from technology and communications services stocks, which led markets higher earlier in the year. With valuations expanding over the past few years, earnings will likely have to carry the heavy load in driving markets higher, in our view.
   
• Inflation declines on lower gasoline prices: Consumer Price Index (CPI) inflation for Canada declined to 1.6% annualized in September, below expectations for 1.8%*. The main contributor to the drop was gasoline prices, which were down 10.7% from a year earlier***. CPI is now in the lower half of Bank of Canada's target range of 1-3%, which should keep the bank on track to continue cutting interest rates in order to ease monetary policy. Bond yields are down, with the 10-year Government of Canada bond yield at about 3.13% and the 10-year U.S. Treasury yield near 4.03%, driven in part by expectations for continued monetary policy easing. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **International Energy Agency *** Statistics Canada}

• Stocks edge higher: U.S. equity markets closed higher on Monday, on a quiet day from a macroeconomic standpoint. In Canada, markets were closed for the Thanksgiving holiday. At a sector level, information technology and utilities were the top performers; however, performance was broad-based, with 10 of 11 sectors finishing the day higher.* Energy was the only sector in the S&P 500 to finish lower, reflecting some weakness in oil prices.* Overseas, both European and Asian markets closed higher following announcements from China's policymakers over the weekend for planned stimulus measures to support the struggling economy. In the commodity space, both oil and gold finished the day lower. Markets will get a read on domestic inflation trends with consumer price index (CPI) inflation data out tomorrow. Additionally, U.S. consumer-spending trends will be in focus with the release of September retail sales on Thursday.
   
• Stimulus hopes send China stocks higher: After a volatile week, which saw the CSI 300 Index decline by 7% last Wednesday, the rally in China stocks resumed overnight, with the CSI 300 index gaining nearly 2%.* On Saturday, China's Finance Ministry held a press conference to outline planned fiscal support for China's economy. While no headline figure was provided as to how large the fiscal package would be, the Finance Ministry did address specific areas of the economy it plans to support. Support measures included alleviating the debt burden on local governments, and funding for local governments to purchase unsold homes from developers.* China's economy has been dealing with a slumping property market, low consumer confidence and spending, and deflationary conditions. Inflation data from this weekend showed that consumer prices in China rose by a modest 0.4% year-over-year in September, while producer prices contracted by -2.8%.* In our view, large-scale stimulus will likely be needed to support economic growth in China. Until there is greater certainty on the size and exact use of fiscal stimulus, we expect equity markets in China could remain volatile. 
   
• Third-quarter earnings off to a strong start: While it's still the early days of third-quarter earnings season, results have been encouraging thus far. Last Friday, several U.S. banks, such as Wells Fargo and JPMorgan, reported strong results, helping send equity markets higher. Earnings-growth estimates are holding steady at around 3% for the S&P 500 in the third quarter, which, if achieved, would mark the fifth consecutive quarter of positive earnings growth.* At a sector level, information technology and communication services are expected to lead the way, with estimates calling for double-digit earnings growth.* Additionally, health care is expected to see healthy earnings growth of roughly 9%.* Looking ahead to full-year estimates, expectations are for S&P 500 earnings to grow by roughly 9% in 2024 and nearly 15% in 2025.* In our view, current valuations have limited scope to expand. Therefore, healthy corporate profit growth will likely be a necessary ingredient in sustaining the bull market.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet}

• Markets move higher: U.S. and Canadian stock markets were higher on Friday, with the S&P 500 and Canadian TSX outperforming the technology-heavy Nasdaq. Sector leadership was driven by financials, which benefited from strong earnings reports from big banks like JPMorgan and Wells Fargo. Financials and industrials were the best-performing sectors of the day in the S&P 500, while the lagging sectors included technology and consumer discretionary*. This is in line with the sector trends over the past several weeks, in which cyclical sectors have outperformed technology and growth sectors broadly. In our view, this broadening of market leadership likely has legs, especially as the Federal Reserve continues its rate-cutting cycle and as earnings growth is driven by both tech and nontech parts of the market.
   
• U.S. producer price index (PPI) inflation comes out in line with forecasts: PPI inflation data for August was in line with expectations. Headline PPI was flat month-over-month, while core PPI was up 0.2% month-over-month. Services inflation was the primary driver of the inflation reading, which was 0.2% monthly, while goods inflation actually decreased by 0.2%*. Within goods, energy and gasoline prices were a large contributor to the decline in prices*. Overall, the PPI inflation was in line with yesterday's CPI inflation reading, which continue to trend lower overall, but which has seen some more-persistent-than-expected components, particularly in services inflation. In our view, with CPI inflation now at 2.4% year-over-year, the last mile to the Fed's 2.0% target may be bumpy, but there are drivers that will likely continue to support a gradual move lower. These include lower wage gains over time, which should support lower services inflation, as well as an eventual move lower in the shelter and rent components of the basket.
   
• Earnings season kicks off on a strong note: The third-quarter earnings season kicked off in earnest on Friday, with big banks such as JPMorgan and Wells Fargo reporting earnings. JPMorgan noted in its reporting that consumers are "fine and on strong footing," and posted record net income figures and raised full-year guidance*. Meanwhile, Wells Fargo also topped analyst forecasts of earnings expectations and noted a more diverse set of revenue streams that helped offset a decrease in net interest income. The financial sector was the top-performing sector of the day on Friday as well. Overall, third-quarter expectations are for about 4.2% year-over-year earnings growth for the S&P 500, well below the 7.7% expectation in place at the end of June*. In our view, the downward revisions in earnings expectations for this quarter have set the bar lower and provides corporations an opportunity to once again beat earnings forecasts and raise guidance. This has been the case thus far with some of the early reporting from the big banks.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}