US Equity markets turned negative in the latter half of the month as earnings season continued. Analysts and investors continue to pressure companies with sky-high valuations from AI investments to show results that their massive investments are coming to fruition. Two years after OpenAI’s ChatGPT started an AI investment frenzy, analysts have been scouring earnings reports for signals that the investments are providing meaningful increases in productivity and punishing companies where they do not find any evidence. Hyperscalers, Meta, Alphabet, Microsoft, and Amazon have all invested heavily in AI but have yet to turn those massive investments into sales. In their recent earnings release, Meta noted that they expect losses in their AI division to persist. The more prominent tech companies' bad news has weighed on the broader group and pulled the combined companies’ shares down.
The focus on the Magnificent 7 companies continues to be the headline-making news, but rightfully so, as the companies are expected to report year-over-year earnings growth of 18.1%. In comparison, the blended growth rate for the other 493 S&P companies is a meager 0.1%.
At a sector level, the top-performing segments were Financials, Communication Services, and Energy, as they were the only positive contributors, returning 2.7%, 1.9%, and 0.9%, respectively, for October. Expectations of increased profitability from anticipated Fed rate cuts and a strong earnings season drove the financial sector's performance. Analysts expect the sector's outlook to remain strong, driven by robust earnings, favorable economic conditions, and a positive regulatory environment.
Only two factors showed positive performance for the month. Momentum continued its strong performance, returning 0.21% for the month, bringing its year-to-date return through October 31st to 39.4%, and Enhanced Value returned 0.06%.
European equity markets had a rough month as the MSCI Europe NR USD returned -5.9% and the S&P United Kingdom BMI NR USD returned -5.7%. UK equity markets fell as Gilts sold off at the end of October, and concerns rose over the latest budget proposal. Expectations for a rate cut from the Bank of England (BoE) fell as the pound continued to weaken relative to the dollar, and home price appreciation slowed in the most recent Nationwide Building Society House Price Index YoY.
In the Eurozone, inflation readings came in stronger than expected, reducing the likelihood of a jumbo rate cut by the European Central Bank (ECB). Both Core CPI and overall CPI exceeded forecasts for the year-over-year change. Unemployment remains at record lows, with the latest rate holding steady at 6.3%. However, equity markets in Italy, Germany, and France posted negative returns for the month, down -2.6%, -4.7%, and -6.3%, respectively.
There are early signs of improvement in China, as home sales saw their first monthly increase this year, driven by the government’s latest stimulus efforts. Factory activity also exceeded expectations, suggesting potential stabilization in the economy. The Caixin manufacturing PMI rose above 50, signaling expansion as recent stimulus measures take effect. However, Hong Kong’s GDP growth disappointed, coming in at 1.8% year-over-year, well below the anticipated 3.1%. Despite these efforts, equity funds experienced outflows for the third consecutive week.
The strength of the US consumer remains a crucial driver of economic growth, with personal consumption continuing to rise month-over-month. The latest data shows the Fed’s preferred inflation measure, the Core PCE, is tracking in line with expectations, while jobless claims have steadily decreased after temporary disruptions from recent hurricanes.
Recent GDP figures from the Atlanta Fed reveal a robust annualized growth rate of 2.7%, marking the sixth consecutive quarter of growth above 2.5%. This resilience comes despite signs of a cooling labor market and easing cost-of-living pressures. While GDP growth above long-term potential (2%) is often seen as inflationary, the current environment defies traditional economic models, with solid growth accompanied by moderating inflation—suggesting a more sustainable trajectory.
The US consumer continues to fuel this momentum. Real Personal Consumption Expenditures showed solid growth in September, and real disposable personal income per capita is now above pre-COVID levels. However, as savings rates decline, consumer spending remains buoyed by increased income, even as higher mortgage rates—the most significant jump since 2022—add pressure to household budgets.
Meanwhile, gold prices have surged to record highs, driven by renewed demand from Western investors. Investment flows have more than offset weakening demand from Asia, with high-net-worth individuals leading the charge. As John Reade of the World Gold Council noted, the shift in demand from emerging markets to Western buyers reflects a growing sense of "FOMO" (fear of missing out) amid rising geopolitical uncertainty. This gold rush highlights how investors seek refuge in safe-haven assets in an unpredictable global environment.
Investors and analysts are pricing roughly 45 more basis points of cuts from the Federal Reserve. Market participants believe the Fed will continue its rating-cutting path during the November FOMC meeting and will likely follow up with another 25-basis point cut in December. The Fed's messaging continues to emphasize a slow and steady pace to the rate-cutting cycle and maintaining a balance between its employment and inflation mandates.
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