October 9, 2023
Market Insights
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 economy grew at a 2.1% annualized rate in 2Q23, in-line with last quarter’s 2.2% pace. Consumption grew a
modest 0.8% saar, while private domestic final sales increased at a 1.7% rate. Business fixed investment
spending also grew 5.2%, its best pace since 1Q22. Further, comprehensive GDP revisions painted a picture of
private sector resilience and improved household savings with softer consumption growth than previously
reported. The economy is clearly showing resiliency in the face of monetary tightening, but strains on the
consumer and business spending may temper growth in the coming quarters.
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
Earnings remained resilient during the 2Q earnings season. Our final estimate for 2Q 2023 operating earnings
per share is $54.90, representing y/y growth of 17.1% and q/q growth of 4.5%. While a strong 71% of companies
beat earnings estimates, only 53% beat revenue expectations amidst slowing inflation. Importantly, profit
margins improved, with our current estimate tracking 11.9%. Financials was the largest contributor to EPS
growth, while the energy sector was the largest detractor.
Inflation
The August CPI report showed continued progress on core inflation while energy contributed to a bounce in
headline inflation. Headline CPI rose 0.6% m/m seasonally adjusted and 3.7% y/y non-seasonally adjusted, an
acceleration compared to last month. This increase was largely anticipated and primarily driven by a 5.6%
surge in energy prices. Core CPI rose 0.3% m/m and eased to 4.3% on a y/y basis. In the details, shelter
inflation continued to moderate while transportation services saw strong gains. However, moderating new and
used vehicle prices in the months ahead should help ease core inflationary pressures. Similarly, headline PCE
inflation accelerated to 3.5% y/y while core PCE eased to 3.9%. Moving forward, we expect that the impact of oil
price spikes will be limited, and this report bolsters the case for the Fed to pause rate hikes.
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.
Investment Themes
Denotes updated information
• 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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October 9, 2023
Market Insights
Data are as of October 9, 2023
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