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Economy/macro: A strong business cycle continued
The US labor market has exhibited signs of cooling this year with rising unemployment, fewer job postings, and weakening consumer sentiment about job conditions. The ratio of job openings per unemployed worker has fallen significantly but remained historically high, suggesting labor markets have normalized, but not shifted into recessionary territory.
Despite pockets of weakness in lower-income segments, the US consumer remains supported by positive real wage gains and strong balance sheets.
Strength in most geographies: Major global economies demonstrated persistent expansion amid improved global financial conditions and stable employment dynamics, despite some softening in manufacturing. The US and several large developing economies—India, Mexico, and Brazil—showed signs of mid-cycle dynamics, while the US still also displayed significant late-cycle characteristics. Canada experienced increasing recession risks relative to other developed markets.
China announced a flurry of new policies toward the end of Q3 that boosted stock prices, partly due to measures to provide liquidity to the equity markets. However, it remains uncertain whether new policy measures will spark an economic reacceleration amid China’s structural imbalances and gloomy consumer sentiment.
Global manufacturing activity decelerated in Q3 but was offset by positive momentum in global services activity and generally stable employment across both developed and emerging markets.
Will inflation reappear? Global disinflation trends continued, as core inflation fell across most major developed and emerging economies. The combination of lower core inflation, falling energy and food costs, and recent cuts in policy rates across most major central banks, all support household real incomes and consumer spending.
Services and shelter inflation, however, remain elevated, possibly due to supply-related constraints in labor and housing. Historically, there have been several episodes in the postwar era in which inflation exceeded 5%, decelerated, and then exhibited a second wave over the next 2 years. Absent a more significant economic slowdown, persistent core inflationary pressures still pose a risk to the outlook.
Profits still look strong: Corporate earnings growth for 2024 was revised lower in Q3 to a still-healthy 9% growth rate. Profit margins have ticked up this year and stabilized well above pre-pandemic levels, and they are expected to inflect higher across all sizes of companies in 2025.
The largest 7 companies have been the biggest contributors to earnings growth in recent years, and the market expects these companies to maintain elevated margins and strong relative earnings power in 2025.
Looking ahead to November: November election outcomes will shape the economic policy debate in 2025, and their overall impact is highly uncertain and dependent on details and implementation next year. Examples of proposals from the Republican party include investor-friendly corporate tax cuts and less regulation of some industries, but also higher tariffs and tighter immigration restrictions that have the potential to be inflationary. Democratic party proposals include a greater emphasis on raising taxes to fund public spending.
No matter who wins, the fiscal deficit is expected to remain large over the next several years (6%–7% of GDP), and interest payments are set to grab an even larger share of the federal budget. Lastly, the election will determine who decides how to deal with the more than $4 trillion of 2017 personal income tax cuts that expire at the end of 2025. With neither political party indicating an intention to address the projected rise in government debt, investors and particularly bond markets may watch the fiscal situation closely in 2025.
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