Earning Doubles
In 1965, Gordon Moore predicted that the number of transistors on a microchip would double approximately every two years. To date, his prediction has proven reliable, allowing technology firms to innovate in unimaginable ways. Likewise, investing possesses its own doubling rule, called the rule of 72. The rule estimates the number of years it takes for an investment to double by dividing 72 by the investment’s expected return.
Although investment returns rarely double as fast as Moore’s prediction for computer switches, recent experience with stock markets parallels it. Investing in US stocks over the past quarter-century essentially quintupled invested wealth. In addition, new classes of technologically advanced companies emerged, all of which benefited from Moore’s law and went on to obtain market dominance. As a result, corporations now earn revenues and incomes that were once unthinkable to investors.
“Year-over-year earnings growth rate could finish in the low double digits, marking the fourth consecutive quarter of double-digit growth.”
Success in the stock market as of late has been primarily driven by corporate earnings that companies distribute as dividends. At the moment, listed companies on the stock market are reporting their third-quarter financial results. If current trends sustain, the year-over-year earnings growth rate could finish in the low double digits, marking the fourth consecutive quarter of double-digit growth. These growth rates closely mirror the experiences of 2021, which ended exceptionally well for investors.
Among the leaders of growth are financial, technology, and consumer stocks. Business fundamentals in these designated sectors have strengthened lately, driving earnings higher. Unfortunately, growth in the communications sector has contracted following a significant negative earnings surprise from one social media service. Yet, third-quarter earnings surprises remain extremely impressive despite some outliers, with about 80% of those that reported beating expectations.
Still, there is a stock market price to acquire record-breaking earnings, and that cost has risen significantly since the tariff setbacks in April. The price-to-earnings ratio is a widely used multiple that investors use to gauge the cost of earnings. That price multiple has recently risen to 23 times earnings ($23 price tag per $1 of income), exceeding its dot-com level and matching its previous quarter-century high set in 2020. Even though the multiple can’t be relied on as signaling an overvalued market. It serves as a reminder that stocks aren’t necessarily cheap by historical standards.
Finally, investors have rewarded companies with positive beats less and punished those with negative surprises more than usual as of late. This has caused some to argue that the market seems tired. Despite the exponential parallels between technology and investing, stock returns are not tangible products like microchips. Therefore, their doubling rates are extremely sensitive and variable to economic change, unlike technology, which follows a more deterministic path.
Tariffs
The major tariff-related news recently centered around negotiations with China. Recent attention has been given to China’s “nuclear option”, stemming from its control over the global supply of active pharmaceutical ingredients. This dependence creates a significant national security risk for the US, as hundreds of US medicines rely on key ingredients solely sourced from China.
Treasury Secretary Bessent stated that a “very successful framework” has been discussed, and the leaders of each country held a meeting to progress it. Both sides agreed to a one-year truce aimed at reducing trade tensions. A clear headline for markets was a tariff reduction by the US, and in return, China agreed to halt its plans to restrict the export of rare earth minerals for at least one year. The limited agreement also included China resuming purchases of “tremendous amounts” of US soybeans.
Similarly, trade tensions with Mexico experienced a temporary reprieve as the Mexican President announced that the US had agreed to extend the deadline for reaching a trade deal for several weeks.
These developments help remove a key downside risk to the near-term outlook and provide markets with a measure of stability heading into next year. However, analysts quickly noted that these developments are “fragile” given the risk of policy missteps and unresolved underlying issues.
Conversely, the Trump administration recently terminated all trade negotiations with Canada based on a Canadian advertisement that used the voice of former President Ronald Reagan to criticize Trump’s tariff policies. Trump further claimed that Canada was attempting to illegally influence the Supreme Court case challenging his tariff authority.
Inflation & Jobs
The record-setting, 43-day federal shutdown finally ended when President Trump signed a bill in the evening of November 12th. White House officials warned that economic reports delayed by the shutdown, including data on inflation and the October job market, “will be permanently impaired” and likely never released. This lack of hard data immediately complicated investor sentiment regarding the Federal Reserve’s path forward. The sentiment has now changed quite drastically, leading to expectations for no further rate cuts in December.
“Even after a historic shutdown, key inflation data held steady, offering investors clearer footing as markets look ahead.”
Further, the shutdown prevented the publication of official September and October jobs and inflation reports as a result of the “data drought” from the Bureau of Labor Statistics (BLS) and the Labor Department. This has created new uncertainty around the condition of our country’s labor markets, which has been further complicated by certain non-governmental information indicating recent sizeable increases in layoffs.
Despite the shutdown, the September Consumer Price Index (CPI) report showed inflation stubbornly holding firm near 3%. While this reading was slightly below economists’ expectations for a 3.1% rise, it marked the highest reading since May and remains above the 12-month average of 2.7%.
Concurrently, the Social Security Administration announced a 2.8% cost-of-living adjustment (COLA) for 2026. Yet, some are concerned that a COLA of 3% will not be enough to keep pace with rising costs for necessities. Furthermore, the looming financial health of the program is a consideration that needs to be addressed.
Federal Reserve
The central bank was forced to make critical policy decisions under some challenging conditions: a severe data blackout and mounting liquidity stress.
Despite most data being delayed, one vital piece of information that was published was the September CPI, which was released late due to legal requirements for calculating Social Security benefits. Since the CPI showed inflation cooling slightly, it helped keep the Fed on course for a rate cut, as many analysts believed the disinflation trend was intact.
“Despite challenging conditions, the Fed stayed on course, delivering another rate cut and signaling a steadier path ahead.”
Following the decision, Powell immediately tempered expectations for future easing, stating that a further reduction in the policy rate at the December meeting is “not a foregone conclusion, far from it”. This caution, based on upside risks to inflation and downside risks to employment, was perceived by markets as a “hawkish cut”.
The weeks following the rate cut were defined by a stark divergence in opinion among policymakers regarding the path forward. Ultimately, Powell summarized the Fed’s cautious approach given the missing data with the metaphor: “What do you do when you are driving in the fog? You slow down”.
On a related note, the Treasury has continued “quantitative tightening”, which means it is intentionally not repurchasing bonds that are maturing off of its balance sheet. This has put increased liquidity into the market. The Secured Overnight Financing Rate, or SOFR, recently rose above the Fed’s target rate, which is an unusual development. Ultimately, this raised questions about how much longer the Fed could continue unwinding its balance sheet without draining essential liquidity and potentially reducing the effectiveness of rate cuts.
Stocks
Powell provided some interesting context surrounding the equity market’s primary driver: the AI Boom. Powell stated that this AI Boom is fundamentally different from the dotcom bubble of the late 1990s. He distinguished the current environment by pointing out that many of the highly valued AI companies have profit, unlike many companies during the dotcom era. Powell noted that AI investments, particularly in chips and data centers, are a major source of economic growth. However, he also acknowledged the capital intensity of the sector, noting that certain high-valued startups are currently burning cash.
Overall, equity markets have been continually hit with uncertainty as of late, including the lingering trade tensions with China, the ongoing US government shutdown, caution surrounding the AI rally, and monetary policy uncertainty. Despite this uncertainty, equity markets remained strong in October, supported by the prospect of a deal with China as well as strong corporate earnings. Yet, stock prices came under pressure more recently in the first couple of weeks of November.
In October, large caps outperformed smaller caps both in the US and internationally. Emerging market stocks had a great month of October. Over the last several years, US large caps and most major international stock market indexes have displayed very strong returns relative to US small caps.
Bonds
The recent Fed rate cut decision and the uncertainty surrounding future monetary policy have created an uncertain backdrop for the bond markets. Despite this monetary policy uncertainty, bonds displayed fairly respectable returns for the month of October. Long-term bonds generally outperformed shorter-term bonds by a significant margin. Over the last five years, long-term bonds have still rather significantly underperformed short-term bonds.
Lower quality bonds, such as floating rate debt and high yield bonds, are still generating attractive total returns. Over a three and five year period, these types of bonds are the only US bond sectors displaying near double digit total annualized returns.
Internationally, there has been quite a divergence between developed countries and emerging market bonds. Although both of these bond segments have provided respectable year-to-date returns, emerging market bonds have outperformed rather significantly on a year-to-date basis, but even more so over the last few years.
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The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock).
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Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.
