October 2025
Earlier this month, in the absence of economic data, investors focused their attention on third quarter earnings. With 91% of S&P 500 companies reporting, 82% recorded an upside surprise to earnings while 77% posted a surprise jump in revenue, according to FactSet. That outcome comes despite the tariff war, the government shutdown, and above target inflation. Inflation, while off the “boil,” seems stalled above the Fed’s 2% target, while the government shutdown was on the verge of seriously damaging consumer confidence.
The initial first thirty days of the shutdown seemed to pass unnoticed, but the concerns about suspension of the SNAP food program for the needy paired with the travel snafus at our airports brought the widening impact to everyone’s attention.
While the shutdown preempted the October employment report, ADP released their private tally of employment showing that for October the economy gained 42,000 jobs for the month, marginally better than the 30,000 that was expected. That number, taken together with the previous two reports, shows the economy added an average of 100,000 jobs a month for the three-month period. Under normal circumstances that meager job growth would be enough to tip the Open Market Committee into another rate cut. However, at the press conference following the October FOMC meeting Chairman Powell described the committee as having “strongly differing views.” Illustrating that divergence, NY Fed President Williams earlier this month suggested that the Fed may return to asset purchases (quantitative easing) soon, and in recent speeches other Fed officials have waffled between whether the current overnight rate is restrictive or just about right. Indeed, Cleveland Fed President Beth Hammack sounded a hawkish tone in her recent speech saying that the current policy is “barely restrictive” and that she expected inflation to remain elevated for two to three years. While she is not currently a voter in terms of monetary policy, she nonetheless has a voice at the meeting and will likely make her case to keep the overnight rate unchanged.
The lack of economic data comes at an especially unfortunate time given that we’re in the middle of the holiday selling season and flying blindly as to the level of consumer spending. Having a handle on how well or dismal retailers are faring would go a long way in guiding the Fed in their decision making.
Reflecting all that uncertainty, Fed Fund futures are pricing about a 50/50 chance that the Fed leaves the overnight rate unchanged in December. While the equity market rallied on the strong Q3 earnings outcome, the expectation of additional rate cuts aided in that rally. With the S&P 500 trading only a few percentage points below the recent all-time high, we wonder if the most recent leg of this rally would be vulnerable to a pullback. Taking that concern to the next level, once the delayed economic data begins trickling out any sign that the economy has weakened further could cause a material selloff in the equity market. In which case the Fed would likely cut rates.
