Magnificent 7 Earnings, Inflation Data Fuel S&P 500's Q3 Surge

The S&P 500 experienced a remarkable surge in the third quarter, driven by strong earnings from the 'Magnificent Seven' tech giants and encouraging inflation data. This growth reflects broader market optimism and economic resilience, as investors react positively to the performance of key companies and favorable economic indicators.

Third-Quarter Earnings in Focus

The third-quarter earnings season has been particularly noteworthy, with the 'Magnificent Seven'—Microsoft, Meta, Amazon, Apple, NVIDIA, Alphabet, and Tesla—taking center stage. These tech titans, which collectively account for a significant portion of the S&P 500's market capitalization, have reported their earnings, with most exceeding expectations. Alphabet, Meta Platforms, and Microsoft reported after Wednesday's close, while Apple and Amazon followed suit on Thursday. Tesla, however, saw a stock price decline after reporting below-expected earnings last week.

Beyond these tech giants, 173 other S&P 500 companies are scheduled to report earnings, including major players like Boeing, Kraft Heinz, ServiceNow, Merck, Mastercard, Chevron, and Exxon Mobil. To date, 86% of companies that have reported have surpassed consensus earnings estimates, highlighting a strong quarter overall.

The Role of the Magnificent Seven

The performance of the Magnificent Seven is critical, as they significantly influence the S&P 500's overall earnings growth. These companies are also key indicators of the health of the artificial intelligence boom and the broader technology sector's direction. Positive surprises in financials, information technology, and industrials have notably boosted the S&P 500's earnings growth rate in recent weeks. Capital One Financial and Chubb led in financials, while Intel stood out in tech, and RTX and GE Aerospace impressed in industrials.

Inflation Data and Market Sentiment

Favorable inflation data has been a major driver of market sentiment. The headline and core CPI, excluding food and energy, both came in at 3% year-over-year, suggesting that inflationary pressures may be easing. This has led to expectations of a 0.25% rate cut from the Federal Reserve, with financial markets anticipating another cut in December. Lower borrowing costs are expected to stimulate economic activity, particularly benefiting banks and other financial institutions.

The recent recovery of regional banks has also contributed to market optimism, as fears surrounding reported loan fraud have subsided. The economy appears more resilient than expected, with the odds of a U.S. recession in 2025 falling to just 4%.

Sales Growth and Economic Resilience

While sales growth is typically tied to nominal GDP growth, current sales growth at 7.0% is outpacing expectations. The consumer discretionary and financials sectors are the primary drivers behind this improved sales growth. However, this divergence raises questions about whether this trend will continue or if sales growth will eventually align with GDP. Investors are advised to monitor management's forward earnings guidance, especially given the uncertainty caused by the government shutdown.

Looking Ahead

Attention will now turn to Fed Chair Powell's comments on future monetary policy. While he is unlikely to make any bold pronouncements given the uncertain labor market outlook, he is also unlikely to challenge expectations for further easing in December. Additionally, a meeting between President Trump and China’s President Xi this week is expected to ease tensions between the two countries, though a full-scale trade deal remains unlikely. Overall, market headwinds are expected to subside, and the current momentum is likely to sustain the market surge.