Markets Find Support in Earnings Strength, Softer Inflation, and Easing Bank Rules

Matthew Rubin Chief Investment Officer

 

1. Early third-quarter results show strong corporate performance and broad earnings growth, supporting a more balanced market outlook despite recent economic softness.¹
2. The Federal Reserve’s (Fed’s) new proposal to scale back capital increases for major banks could support future credit growth and mark a shift toward lighter regulation.
3. September CPI data came in softer than expected, offering the Federal Reserve important confirmation of easing price pressures before its upcoming policy meeting.

 

1. Strong Start to Earnings Season Highlights Broader Market Resilience

The third-quarter earnings season began on solid footing last week, offering reassurance amid limited economic data from the ongoing government shutdown. About 85% of S&P 500 companies that have reported so far have exceeded expectations. If the trend continues, this could become one of the strongest earnings outperformances in recent years.¹ Overall, S&P 500 earnings are projected to rise about 8.7% from a year earlier, with growth expected across seven of the 11 major sectors.¹

Technology companies are anticipated to lead gains, followed by the financial and utility sectors. Tesla, one of the “Magnificent 7,” reported earnings that missed expectations despite stronger revenue, underscoring how performance within the group remains uneven.¹ Even so, resilient corporate balance sheets and broad-based profitability have helped companies withstand persistent pressures from tariffs and trade uncertainty. With valuations elevated, continued earnings strength will likely remain a key driver of market direction and reinforce the case for diversification across sectors.¹

2. Fed Signals Softer Approach to Bank Capital Rules

The Federal Reserve released a proposal last week outlining smaller increases in capital requirements for the nation’s largest banks than were called for in a more stringent framework introduced in 2023.¹ This marks the second proposed moderation from the sizable capital hikes designed to strengthen financial stability. The latest plan aims to strike a balance between safety and lending flexibility.

Higher capital requirements aim to help banks absorb losses during downturns but can limit profitability and lending capacity. By easing the proposed increases, the Fed may create conditions for stronger credit growth in the coming years. The move also reflects a broader regulatory shift toward a lighter-touch approach under the current administration. As new leaders settle into key regulatory roles, a more consistent deregulatory tone could emerge in 2026, shaping how banks allocate capital and how credit flows through the U.S. economy.

3. Cooling Inflation Provides Key Signal Ahead of Fed Decision

Last Friday’s Consumer Price Index report delivered a rare look at the U.S. economy, as most government data releases have been halted during the shutdown. Headline CPI rose 0.3% in September and 3% over the past year, while core prices increased 0.2% on the month and also reached 3% annually, both below expectations.² Core goods prices showed only small gains, suggesting limited inflation pass-through so far from higher tariffs.

Data on import patterns and tariff revenues point to companies shifting production toward lower-tariff countries, helping them absorb cost increases and reducing the impact on consumer prices. Economists expect tariffs could still push goods prices higher over time, but likely as a one-time adjustment rather than a persistent inflation driver.

Energy costs climbed, led by higher gasoline prices, while food and shelter categories continued to rise more gradually.² This CPI release moved forward because it guides Social Security benefit adjustments and serves as the final major data point before the Federal Reserve sets interest rates next week. With inflation holding below recent peaks and labor market indicators softening, markets expect the Fed to deliver another rate cut, while the longer-term policy path remains uncertain.²

For the period ending 10/24/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ Bloomberg
² CNBC

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A Composite PMI is a single index that tracks economic activity by combining the performance of both the manufacturing and services sectors, providing a comprehensive overview of overall business conditions.
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The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index.
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 200^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_32