Better Than Expected Earnings and Inflation Data Drive Stocks Higher: The S&P 500 closed out the week at a record high in response to strong third-quarter corporate earnings reports and slightly lower-than-expected inflation data for September. On Friday, the S&P 500 Index briefly crossed the 6,800 level for the first time before closing at 6,792. The Index gained 1.9% for the week, bringing its year-to-date return to 16.7%. Most sectors finished higher, led by technology, energy, and industrials. Abroad, developed markets advanced 1.3%, while emerging markets climbed 2.0%, bringing their year-to-date gains to 27.2% and 31.7%, respectively.

Earnings Estimates on the Rise: As of Friday, close to 30% of S&P 500 companies had reported Q3 earnings results, with 87% beating analysts’ expectations as tracked by I/B/E/S. Analysts currently estimate third-quarter earnings per share (EPS) growth, measured year over year, at 10.4%, up from 8.8% on October 1st. Full-year 2025 EPS growth is estimated at 11.2%, up from 10.8% at the start of the month.

Inflation Below Expectations: September’s Consumer Price Index (CPI) rose 3.0% year-over-year, up from 2.9% in August, but below the Bloomberg consensus forecast of 3.1%. Core CPI, which excludes food and energy prices, ticked down to 3.0% from 3.1% in August, also below the consensus forecast of 3.1%.

Business Activity Appears Solid at the Start of Q4: S&P Global’s preliminary October U.S. Composite Purchasing Manager Index (PMI) rose to 54.8 from a final reading of 53.9 in September, beating Bloomberg’s consensus forecast of 53.5. The PMI measures business activity in both the services and manufacturing sectors. PMIs above 50 reflect expansionary conditions.

Interest Rates & Bonds: Interest rates showed little movement last week as strong economic indicators appeared to counterbalance favorable inflation reports. The yield on 10-year U.S. Treasury notes was unchanged for the week, settling at 4.00% on Friday. The Bloomberg U.S. Aggregate Bond Index gained 0.2%, while the Bloomberg U.S. Municipal Bond Index rose 0.3%, extending their year-to-date returns to 7.4% and 4.0%, respectively.

The relentless gains in the stock market have surprised many forecasters given uncertainties surrounding the Trump Administration’s trade policies and simmering geopolitical risks. Inflation, while easing somewhat in September, remains well above the Federal Reserve’s 2% target, raising questions about how much lower it can reduce the fed funds rate. The stock market is expensive compared to its historical valuation metrics, but earnings have exceeded expectations every quarter this year. Economists have underestimated the resilience of the economy, and analysts have underestimated corporate earnings power. The S&P 500 has gained 16.7% through Friday, ahead of analysts’ estimated earnings growth of 11.2%. However, estimated growth seems likely to prove too low given the Q3 upside surprise trend. The S&P 500 is extended and vulnerable to profit-taking on any disappointing news but does not appear to be in bubble territory given its solid underlying fundamentals.

Fed Rate Cut Expected: The Federal Open Market Committee (FOMC) will conclude its October meeting on Wednesday. It is widely anticipated that the FOMC will cut its target range for federal funds by 0.25% to 3.75%–4.00%. As of Friday, fed funds futures implied a near 100% probability of an additional 0.25% rate cut at the FOMC’s next scheduled meeting in December. The Fed’s commentary following this meeting will come under scrutiny as investors attempt to determine whether the apparent strength of the economy through the third quarter has altered its outlook for future rate cuts.

A Big Week for Earnings: Another 175 S&P 500 companies are scheduled to report Q3 earnings this week. Artificial intelligence-related stocks will be in focus, with mega-cap tech companies Alphabet, Amazon, Apple, Meta Platforms, and Microsoft releasing their results.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager