Market Matters – “Goldilocks Continues the climb via earnings optimism”

Last week, markets continued their rally, with major indices approaching all-time highs. Momentum that had already been building gained strength after a softer-than-expected US inflation report, bolstering confidence that the disinflation trend remains intact.

Equities rose, bond yields decreased, and volatility remained low; a rare and welcome combination that suggests investors are still eager to embrace risk. While valuations are undoubtedly high, it does seem that we’re not facing an “everything bubble,” but perhaps a bubble of concentrated fear of a bubble. Or to put it another way…

The anxiety about stressed market conditions has become a trade in itself.

Earnings reports have generally been reassuring, the economy continues to demonstrate resilience, and markets are rising despite ongoing concerns. Whether this calm will be sustainable or will represent another phase in a longer-lasting upward trend is yet to be determined. For now, however, optimism is prevailing.

Inflation & US Macro

Last week’s inflation report quietly reinforced the softer trajectory that markets have been banking on. Headline consumer prices rose around 3% year-on-year in September, with a modest monthly increase that undershot expectations. Core inflation (the measure that excludes food and energy) was also steady at roughly 3%, suggesting that underlying pressures are cooling (and, crucially, not collapsing).

The result was enough to push rate-cut expectations higher, with markets now pricing in two more reductions before the end of the year. It’s a shift that helped the two-year Treasury yield ease lower, even as the ten-year remained pinned around 4%. The shape of the curve tells its own story: short-term confidence in disinflation, but a lingering unease about what happens further out.

Looking beneath the surface, inflation is not melting away. Fuel costs picked up over the month, shelter inflation remains sticky, and some goods categories are still showing pricing power. Concerningly, household inflation expectations have nudged up slightly, a reminder that while the data may please markets, it still leaves the Fed with a delicate communication challenge.

For equities, the mix remains close to ideal. Inflation is easing without choking growth, policy expectations are turning supportive, and earnings momentum is still positive. The combination has lifted the S&P 500 to record territory and kept volatility pinned near its lows. However, this “calm” feels late-cycle in tone: valuations are rich, breadth is narrowing, and optimism increasingly depends on moving parts of a complex narrative continuing unimpeded.

In short, inflation has given the market just enough to keep the party going – not too hot, not too cold. But it also reinforces how dependent this rally has become on data staying in that narrow Goldilocks range. If the next few prints drift the wrong way, the mood could shift quickly. For now, though, the trend remains the investors friend!

Earnings – underpinning the optimism!

The third-quarter earnings season has come through strongly so far, adding further momentum to markets already buoyed by softer inflation and easier rate expectations. Around a third of the S&P 500 has now reported, and the numbers have been robust. 87% of companies have delivered earnings above estimates (well ahead of the 5 and 10-year averages), and revenues have also surprised positively across most sectors. It’s not just the ‘beat’ rate that stands out; the scale of the upside is respectable too, with reported earnings roughly 8% above forecasts and revenues around 2% to 3% above expectations.

The pattern of results shows an encouraging variety of sectors, relative to investors’ fundamental concern that significant earnings growth is limited to the M7. Financials, technology, and industrials have been the biggest contributors, while consumer discretionary names are beginning to show better pricing power and volume resilience. By contrast, healthcare and energy have lagged, reflecting cost pressure and normalising commodity prices. Overall, the blended earnings growth rate for the quarter now sits just above 9%, up from around 8% a few weeks ago, marking the 9th consecutive quarter of year-on-year earnings growth for the index.

On the revenue side, the story is similar. Around 83% of companies are reporting higher-than-expected sales, the strongest ratio since 2021. The blended revenue growth rate stands at roughly 7%, the best in three years, and 10 of the 11 sectors are delivering positive year-on-year growth. Technology continues to lead, with financials, utilities and materials also making strong contributions.

Forward estimates have firmed as a result. Consensus expectations for S&P 500 earnings growth over the next three quarters range from around 7%to 12%, with full-year 2025 earnings now expected to rise by roughly 11%. That strength in profits, combined with the renewed disinflation narrative, goes a long way to explaining why equity markets are sitting near record highs.

Valuations, of course, remain a crucial watch-point for us and every investment professional as the ‘canary’ in this particular coalmine. The forward 12-month price-to-earnings ratio of about 23x is above both the 5 and 10-year averages, but not unreasonable given the earnings trajectory and the prospect of lower rates. Markets will need continued follow-through in corporate results to justify these levels, but for now, the fundamental backdrop remains on the bulls’ side.

In essence, earnings have validated the optimism. With profits expanding, revenues firm, and guidance broadly steady, investors have reason to stay constructive. There are still pockets of fragility, narrow leadership, elevated multiples, and sentiment that borders on complacency, but the underlying story is one of resilience.

The market may be expensive (by traditional metrics), but it’s being paid for by rising earnings rather than naïve hope.

Japan – a new chapter but with familiar challenges

Japan’s political uncertainty has eased, at least for now, with the bold appointment of Sanae Takaichi as the country’s first female prime minister. Her unexpected rise has steadied the coalition and set a new, more assertive policy tone. Early signs point to a pro-growth agenda: a fresh supplementary budget to offset inflation pressures, renewed emphasis on energy security through nuclear restarts, and higher defence spending. Fiscal policy will loosen, even as the Bank of Japan’s path remains uncertain.

Markets initially assumed her government would favour continued monetary accommodation, sending the yen lower, but that may prove premature. Governor Ueda’s term still runs for several years, and the BOJ has been hinting at a desire to reassert its independence, noting that a hawkish policy turn cannot be ruled out.

Beyond the macro story, the opportunity in Japan lies in what Takaichi can finish rather than what she can restart. Corporate governance reform, consolidation and productivity gains remain unfinished business from the Abe era. Japan’s small-cap market, long stagnant and chronically undervalued, stands to benefit most if this reform drive gains traction. With valuations deeply discounted and balance sheets strong, selective exposure here could offer one of the more interesting medium-term opportunities in global equities. We therefore remain relatively neutral, but constructive on Japan as a region.

United Kingdom – inflation holds, eyes turn to the budget

UK inflation unexpectedly held steady at 3.8% year-on-year in September, undershooting expectations of a small rise and reinforcing the sense that price pressures are gradually ebbing. Falling food bills, the first decline in over a year (and certainly not reflected in my Ocado basket), offset higher fuel prices, while service inflation, still the Bank of England’s primary concern, remained unchanged at 4.7%.

The market reaction was swift. Gilt yields fell, and traders priced in a strong likelihood of a rate cut before year-end, as the data gave the Bank more breathing room after months of caution. With growth sluggish and inflation moving in the right direction, the next few policy meetings now look more finely balanced than at any point this year.

Attention is also turning to the Autumn Budget, where fiscal room remains limited but political pressure to stimulate growth is building. With the sentiment clock ticking and with increasing pressure from Reform and from within the party to enact real change, there is growing speculation that the Chancellor will aim to deliver a modest boost, potentially through targeted tax relief or investment incentives, even if it risks complicating the BoE’s inflation-fighting narrative.

For markets, the mix of fading inflation, potential policy easing and fiscal manoeuvring is a (mild) net positive. UK equities remain attractively valued, particularly in the mid-cap space, and domestic sentiment is beginning to stabilise after a long period of neglect. The FTSE100 (as we continually remind clients) continues to benefit from its global composition and sterling’s softness, while the FTSE 250 offers more cyclical upside if confidence improves.

In short, the inflation backdrop has turned more benign just as fiscal policy edges back into focus. The next act will depend on how carefully the government balances pre-election generosity with market discipline, but for now, both bonds and equities are finding reasons to stay optimistic.

This Week…

Wednesday (evening) Earnings: Microsoft, Alphabet, Meta etc… relevant bellwethers for the health of the market.

Wednesday/Thursday – Eurostat preliminary (flash) GDP: This data will feed into ECB assessment at its meeting later in the week.

Thursday/Friday US Bureau of Economic Analysis: Advance estimate, Q3 GDP figures. any growth surprise (up or down) will move yields, USD and risk appetite.

Thursday/Friday ECB Governing Council meeting & press conference: Markets will parse the statement and Q&A for timing of future rate moves.

Thursday/Friday Bank of Japan: Monetary Policy Meeting conclusion / Outlook materials (Oct 29–30) — any surprises in guidance or the Outlook Report can move the JPY and Asia-EUR/USD flows.

Friday Earnings: Amazon and Apple (after close) as above for Meta and Alphabet.

Friday US Bureau of Economic Analysis: Personal Income & Outlays contains the monthly PCE inflation gauge (core PCE) which is watched closely for Fed policy implications.

Friday ONS: Blue Book publication scheduled (National accounts statistics including industrial analyses) has a meaningful effect on policy, narrative and investor understanding of the economic landscape of the UK.