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

The S&P 500 just had a banger of a quarter, and it's not just about meme stocks or crypto pumps. Big Tech's earnings, cooling inflation, and the AI hype train are all fueling the market's rise.

What Happened

The third-quarter earnings season is in full swing, with a spotlight on the 'Magnificent Seven'—Microsoft, Meta, Amazon, Apple, NVIDIA, Alphabet, and Tesla. These tech titans, responsible for a huge chunk of the S&P 500's market cap, are dropping their earnings reports this week. Five of them, specifically: Alphabet, Meta Platforms and Microsoft reported after Wednesday's close, while Apple and Amazon reported Thursday after close. Last week, Tesla was the only member of the seven to see a stock price decline after reporting below-expected earnings. Warren Buffett's Berkshire Hathaway is also in the mix.

Beyond the mega-cap tech, 173 S&P 500 companies are slated to report earnings, including Boeing, Kraft Heinz, ServiceNow, Merck, Mastercard, Chevron, and Exxon Mobil. So far, 86% of companies that have reported have exceeded consensus earnings estimates.

Why It Matters

The Magnificent Seven's performance matters because they heavily influence the S&P 500's overall earnings growth. They are also key indicators of the artificial intelligence boom's health and the broader technology sector's direction. Positive surprises in financials, information technology, and industrials significantly boosted the S&P 500's earnings growth rate last week. Capital One Financial and Chubb led the charge in financials, while Intel stood out in tech, and RTX and GE Aerospace impressed in industrials. A key driver of market sentiment has also been friendlier inflation data, with CPI readings better than expected. This has all but guaranteed a 0.25% rate cut from the Federal Reserve, with financial markets anticipating another cut in December.

Our Take

The better-than-expected inflation numbers are a big deal. The headline and core CPI, excluding food and energy, both came in at 3% year-over-year. This suggests that concerns about price pressures from tariffs might be overblown, and the recent acceleration in inflation may be subsiding. Rate cuts typically benefit the market, especially banks, as lower borrowing costs stimulate economic activity. Plus, the regional banks are recovering, allaying fears surrounding reported loan fraud. It seems the economy is proving more resilient than expected, with the odds of a US recession in 2025 falling to a mere 4%.

It's worth noting that while sales growth is generally 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 a question: will this trend continue, or will sales growth eventually align with GDP? Keep an eye on management's forward earnings guidance, especially given the uncertainty caused by the government shutdown.

What's Next?

All eyes will be on Fed Chair Powell's comments regarding future monetary policy. While he's unlikely to make any bold pronouncements, given the murky outlook on the labor market, he's also unlikely to challenge expectations for further easing in December. Also, President Trump is scheduled to meet with China’s President Xi this week, and markets anticipate some thawing in tensions between the countries, though a full-scale trade deal is unlikely. All in all, it is likely that market headwinds will ease up, and that further momentum should sustain the market surge.