Making Sense: October Q&A

Amy: Hi. I'm Amy Thomas, a strategist here at First Citizens Bank. I'm joined by our market and economic research team, Phil Neuhart and Blake Taylor, to talk about some of the questions we are hearing most often from clients. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. None of this information should be considered as tax, legal or investment advice.

So Blake, in our most recent basis-points note, we talked about how we're experiencing two economies in this country. Can you talk a little bit about that?

Blake: Well, in the aggregate, US economy is doing exceptionally well. GDP growth is coming in at about 3%, and the labor market's doing well. Unemployment is at 4%, up from last year but still well below historical averages. And last month, the economy created over 250,000 new jobs, which is way more than we were expecting.

So it's never right to just entirely dismiss the aggregates, but it is important to think about the composition.

How are different-sized businesses and different types of households contributing to these aggregate numbers? So let's think about that. Take large companies, for example. Financial conditions for large companies, which is how easy or difficult is it for a big company to obtain the credit and financing that it needs to grow and operate, are currently still quite easy.

So equity prices are very high. Although interest rates are elevated, the spreads at which big companies borrow are very tight. So when a big company wants to expand or grow, it's been able to get that financing. The same probably hasn't been the case for smaller companies, and remember that about half of the US workforce is employed by one of the 33 million small businesses in this country with 500 or fewer employees.

And over the last few years, those are the companies that have probably been hit by inflation a little bit harder. When the labor market was distorted, those companies probably had higher labor costs, especially around switching when it was difficult to get labor. So it's important to look below these big headline numbers and think about how's the whole suite of the economy doing.

Phil: Yeah. And look, we are hearing this on the road. We spend a lot of time meeting with clients. Small business owners feel very different than the largest companies in the world. They're more exposed to higher interest rates, for example. They're more dependent on debt than the very biggest companies. There's a reason that when interest rates have fallen in recent months, we have seen small-cap stocks rally. That broadening is driven by smaller companies being exposed more to interest rates—not to mention inflation, wage inflation, for example. You're going to feel that a lot more as a mid or small company than you are a very big company.

We're also hearing it on the consumer side. We are seeing the lower-income consumer feeling it more. Delinquency rates have risen, whereas high-net-worth individuals are more exposed to the positive wealth effect of high stock values and high home values.

That is very different for a lower-income individual. So there's no question that we have two economies, and really, we do not give presentations in which we don't hear this question. It is a very common topic on our clients' minds.

Amy: And speaking of interest rates, the long-awaited first rate cut finally came in September. And since then, we've seen some surprising data points on both sides of the dual mandate. Blake, how do you think the Fed will be balancing this equation as they stair-step rates down?

Blake: Well, you said it right. It's going to be a tight balancing act. And at any given time, the Federal Reserve, when deciding what's the appropriate interest rate for the US economy, is considering all of the global macroeconomic and financial market data that's out there. But at the end of the day, the Federal Reserve is tasked with only three things, and that's maximum employment, stable prices and moderate long-term interest rates for the US economy. And usually, it focuses on two of those things, which you said of the dual mandate: maximum employment and stable prices.

And when the economy is very weak coming out of a recession, for example, then at least the Federal Reserve knows exactly which one of those to focus on. So think about right after the Great Recession or right after the coronavirus pandemic. The Fed kept interest rates low to try to stimulate economic activity and get employment back to where it should be, and inflation wasn't a problem at the time. But when inflation is a problem and the economy is running hot, that's not at all a desirable condition either. But again, at least the Federal Reserve knows which of these does it need to work on more closely. We need to bring inflation down. We need to bring interest rates up.

Where we are right now is it's very unclear which of these should be getting the priority. Unemployment is up from where it was. A few months ago, financial markets thought that the labor market was deteriorating potentially rapidly.

Inflation is still not low enough. It's still above 2%. So going forward, the Federal Reserve is going to have to deal with these competing interests, which we call this tight balancing act, and that's probably going to lead to increased risk of financial market volatility.

Phil: That's right. It's really a driver of uncertainty. In September, the Fed cut 50 basis points or half a percent. We felt that that was the right move at the time and said so, but that doesn't mean that they're going to continue to do that.

And we have seen expectations move pretty rapidly. We had this surprisingly strong labor market report. And what happened in Fed Funds futures? Well, they had expected 10 quarter-point cuts in total through the end of next year. Now that's eight, right? Bringing you to about 3.5%. So we are seeing expectations move pretty rapidly based on data releases. As we look ahead to the November and December meetings, right now, 25-basis-point cut seems pretty much the base case. That doesn't mean it can't change. It certainly can. That is why we all watch data so closely. But right now, that's where we stand.

Amy: And it's hard to believe, but we are in the middle of October, and that means we're in earning season. What are you seeing so far, and what are your expectations going into 2025?

Phil: Sure. We're in the middle of earnings season. It's still very early. Less than 50 S&P 500 companies have reported as of this recording.

So far, results are pretty good. Big financial institutions have reported. If you look across those 47 companies, 80% of companies roughly are beating their earnings expectations. So pretty good results so far, but we're still waiting on big cyclical names like technology and industrials and consumer discretionary. So a long ways to go.

Coming into this earnings season, we expected year-on-year earnings growth is roughly 4%. Likely, we will see a beat there, which has been the pattern from for many quarters now, growth of above 4%. But maybe more importantly is looking ahead to next year.

Expectations are for roughly 50% earnings growth next year. This time of the year is when you start to see analysts sharpen their pencils on next year. As we start to get a lot of company guidance looking ahead to next year, we'll be very focused on that forward guidance. Where do companies guide analysts? Usually, you would expect that 15% growth number to moderate lower.

Do we see that? Long ways to go in this earning season, but that's what we'll be watching is not just the results of the last quarter, but what our company is saying about the future.

Amy: Well, thank you both for answering questions. We hope you found this information helpful. For more information, please visit FirstCitizens.com/Wealth.

Making Sense

In Brief – A look at the week ahead in under two minutes every Monday morning

Q&A Videos – Monthly conversations covering 2-3 of the top questions we're hearing from clients.

Market updates – Monthly interactive discussions with in-depth analysis of markets and the economy

Articles – Often coinciding with market or economic events

Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Important Disclosures

This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.

Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested.

About the Entities, Brands and Services Offered: First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc., a bank holding company. The following affiliates of First Citizens BancShares are the entities through which FCW products are offered. Brokerage products and services are offered through First Citizens Investor Services, Inc. ("FCIS"), a registered broker-dealer, Member FINRA and SIPC. Advisory services are offered through FCIS, First Citizens Asset Management, Inc. and SVB Wealth LLC, all SEC registered investment advisors. Certain brokerage and advisory products and services may not be available from all investment professionals, in all jurisdictions or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender, and SVB, a division of First-Citizens Bank & Trust Company. icon: sys-ehl

FirstCitizens.com/Wealth/Disclosures

SVB.com/Private-Bank/Disclosures/Form-ADV