Equity Overview

Every sector in the S&P 500 rose in October, with energy stocks in the lead and consumer stocks lagging.  Value stocks outperformed growth.  Volatility was extreme, as the S&P 500 moved more than 1% on 12 of 21 trading days—with 8 of those moves above 2%. The forward price/earnings ratio for the S&P 500 at month end was 16.3, well below the 5-year average of 18.5.

The tenor of third quarter earnings reported in October echoed the theme of second quarter results:  decent but unimpressive.  However, “decent” was enough to satisfy the markets, as fears of a steep earnings decline proved unjustified.  With 52% of S&P 500 companies reporting, 71% beat consensus earnings expectations and 68% beat consensus revenue expectations—in both cases, lower than the one-year average beat rate.  And once again the magnitude of earnings beats was modest, averaging 2.2% above consensus versus 3.1% in the second quarter and 6.5% for the previous year.

Macro Overview

Economic headlines in October were again mixed.  Payroll numbers declined but were better than expected, and, and unemployment ticked down to 3.5%.  Retail sales were flat.  But housing continued weak as mortgage rates remained elevated.

Inflation dropped to 8.2% annualized (from 8.3% in September), which raised hope that the Fed might be able to moderate its interest rate increases later this year.

Notably, third quarter GDP rose 2.6%.  This suggests that the economy is not in a recession, notwithstanding that GDP declined in the two previous quarters.  However, projections for future growth are pessimistic.  The International Monetary Fund (IMF) expects US GDP to decline from 5.7% in 2021 to 1.6% in 2022, and 1.0% in 2023.