Market Insights October 30, 2023

Economic Update
Dr. David Kelly, CFA | Chief Global Strategist for J.P. Morgan Asset Management

This weekly update provides a snapshot of changes in the economy and markets and their
implications for investors.

Growth
The U.S. economy grew at an impressive 4.9% annualized rate in 3Q23, a sharp acceleration compared to last
quarter. Many of the underlying details looked strong, as consumption, private inventories, single-family
homebuilding and government spending all contributed to growth. On the other hand, weakness in private non-
residential investment and a modestly widening trade deficit helped pare back gains. While the continued
resilience of the U.S. economy is welcomed, this strength will be difficult to maintain. In the months ahead, a
weaker consumer, tighter financial conditions and slower business spending should weigh on growth.

Jobs
The September Jobs report showed that the labor market remains resilient, with strong hiring momentum but a
notable lack of upwards wage pressure. Non-farm payrolls rose by 336K, well above expectations of 170K, with
upward revisions of 119K jobs to the prior two months. Job gains were widespread but most significant in the
sectors that have had the hardest time finding workers, pointing to a continued normalization in the labor
market. Average hourly earnings rose by a modest 0.2% m/m, bringing the year-over-year rate down to 4.2%,
despite strong job gains. The unemployment rate remained at 3.8% as modest labor force growth was matched
with a gain in workers. Overall, this report clearly shows a picture of labor market strength, but also
underscores the economy’s ability to maintain unemployment below 4% with only moderate wage growth.

Profits
The 3Q23 earnings season is well underway. With 58.8% of market cap having reported, our current estimate for
operating earnings per share (EPS) is $55.43. If realized, this would represent y/y earnings growth of 10.1% and
q/q growth of 10.1%. Margin growth has been the largest contributor, adding 5.0%, while revenue growth has
also contributed. Management commentary has been relatively downbeat so far, painting a picture of a more
challenged business environment ahead.

Inflation
The September CPI report was mostly in-line with expectations with core inflation continuing to show signs of
moderation. Headline CPI rose by 0.4% m/m and 3.7% y/y, slightly hotter than expected, while core CPI rose by
0.3% m/m and 4.1% y/y. In the details, elevated energy prices as well as shelter and transportation costs
buffeted headline inflation, whereas lower goods prices allowed some easing in the core measure. Core
services inflation ex-shelter also saw progress but remains dominated by the soar in car insurance premiums
this year. Similarly, headline and core PCE matched expectations, rising 3.4% and 3.7% y/y, respectively. Energy
may contribute to bouts of headline volatility in the coming months, but continued progress on core disinflation
and rising real yields makes another rate hike from the Federal Reserve all the less necessary.

Rates
In a widely anticipated move, the FOMC voted to leave the federal funds rate unchanged at a range of 5.25% to
5.50% at its September meeting. The updated “dot plot” remained hawkish, with the median FOMC member
now expecting only two cuts in 2024. This likely stems from the Fed’s expectation for continued economic
resilience. In the Summary of Economic Projections, real GDP growth expectations rose meaningfully for 2023
and 2024. Elsewhere, the median forecast for the unemployment rate fell to 3.8% while the core PCE forecast
ticked lower. Overall, the Fed appears to be forecasting a “soft-landing” scenario. However, with plenty of
headwinds facing the current economic expansion, the risk of overtightening could challenge this outlook.

Risks
• Tighter lending standards, weakness in commercial real estate and an overly aggressive Fed could threaten
economic growth.
• Elevated equity valuations leave the market susceptible to corrections.
• Markets may struggle to move higher until investors receive clarity on the potential for a recession.

Denotes updated information
Investment Themes
• After 2022's sell-off, fixed income now offers higher yield and more protection against a market correction or
economic downturn.
• Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate
environment.
• Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.

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Market Insights October 30, 2023

Data are as of October 30, 2023

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