Earnings Strength Anchors a Volatile Market

Executive Summary 

The stock market has stayed resilient with sporadic pullbacks and shots of volatility. We expect this choppiness to continue into year-end. The real story remains the same: The economy has been resilient, the consumer has been resilient, and the Fed has cut rates in an economic expansion due to an increased focus on a weakening labor market. All in, earnings drive stock prices, and the forward earnings picture is encouraging around the world. We believe in thoughtfully diverse equity exposure across size, style, and geography with a focus on high quality fixed income and complementary private equity and asset backed lending strategies. 

The Fed delivered the October interest-rate cut as expected by the market, and, as of November 7, the odds for a December rate cut stood at 72% (based on fed fund futures). This number is up from the previous week, and we believe it rose primarily due to the weak Challenger Report jobs data. Two-year Treasury note yields at the end of the week were near 3.53% and still below the fed funds effective rate of 3.87%. We believe the two-year note yields are still telling investors there is a decent chance of another rate cut in December, but it is far less certain today compared to the last few weeks.  

Inflation Expectations Are Anchored. Last week’s market expectations for inflation declined. The one-year breakeven inflation rate was 2.63%; the two-year breakeven rate was 2.51%; the five-year breakeven inflation rate was 2.35% and the 10-year breakeven rate was 2.63%. 

Fundamentals Matter.  The third quarter earnings season is essentially over at this point, with 90% of the S&P 500 companies reporting so far. In this strong earnings season, six out of 11 sectors have posted double-digit earnings-per-share growth, led by the technology and financials sectors. We believe investors will be focused on NVIDIA when it reports on November 19. NVIDIA has contributed 20% of the S&P500’s year to date returns ending 9/30/25. We believe the market looks forward, not backward, and is clearly expecting continued earnings growth in 2026. The consensus earnings estimate for calendar year 2026 forecasts +12% year-on-year vs 2025. The S&P 500 is trading 21.8x next year’s earnings. When you remove the Magnificent Seven stocks, that number is about 20x. Since 1990, the median forward multiple is about 19x. We are more muted in our view of earnings growth in 2026, but believe in the positive year-over-year trend. 

Munis Matter. We believe municipal bonds may be suitable for certain investors. The supply issue that impacted this market earlier in the year seems to be behind us, and performance has been improving quickly. Municipals posted strong positive performance in October. Last month marked one of the best Octobers in the past two decades. The Bloomberg Municipal Bond Index returned 1.24% in October, outperforming both the Bloomberg U.S. Aggregate Bond Index and the Bloomberg U.S. Treasury Index, which each returned 0.62%. If investors lean on history according to Macrobond, when the Fed cuts rates after a pause, forward returns for US Treasuries over the next year were positive, averaging 6%. Similarly, corporate IG bonds have historically generated an average 8% returns one year after the Fed’s resumption of rate cuts after a pause.   

Equities 

The S&P 500 returned -1.6% for the week. The market grew concerned over the state of the labor market, with the largest corporate job cuts in October in 20 years, and consumer confidence plunged to near its lowest level on record. Investors are also concerned about the high valuations of AI stocks, which have driven the market this year.  Technology (-4.2%) and communication services (-1.7%) stocks were the key laggards in the S&P 500. EAFE markets returned -0.8% with Europe (-0.9%) and Japan (-0.7%) showing weakness, while EM markets returned -1.4% with gains in Brazil (+2.1%) and China (+0.3%) offset by Korea (-6.1%), which took a breather after a +23% gain in October. 

From a valuation perspective, the S&P 500, the NASDAQ and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.0, the NASDAQ at +1.6 and EM at +1.4. For the next 12 months, EPS growth for S&P 500 is expected to be 10.7% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.2% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.  

Fixed Income 

Investment grade fixed income sectors had mixed returns as rates rose slightly at the long end of the curve and spreads widened. Municipals returned +0.1%, US AGG returns were flat, and the US IG returned -0.2%. HY bonds returned -0.3% as spread widened 15bps while bank loans returned +0.1%. EM debt returned -0.2% as the U.S. dollar fell 0.2% and spreads widened 12bps. 

Rates 

Rates rose slightly at the long end of the curve. The recession-watch 3M-10Y spread compressed 1bp to +24. The 2Y-10Y spread widened 3bps to +53. Rates rose in other developed markets. The BTP-Bund spread is at 0.77%. 5-year breakeven inflation expectations fell 3bps to 2.38% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations fell 2bps to 2.29% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 4bps to 1.80%. The market now prices only a 67% probability of an additional rate cut in 2025 vs the Fed’s guidance of one cut. At year-end 2025, the market expects the Fed Funds rate to be 3.71% vs. the Fed’s guidance of 3.5%-3.75%. For 2026, the market expects two cuts vs. the Fed’s guidance of one cut. 

Currencies/Commodities 

The dollar index fell 0.2%. The commodities complex fell 0.5% as energy prices were flat for the week. Brent prices fell 2.2% to $64/bbl; U.S. natural gas prices rose 4.6% while European gas rose 0.5%, both related to weather fluctuations. 

Market monitors 

Volatility rose for equities and for bonds (VIX = 19, MOVE = 74); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) edged lower from +7 to +2.