Growth in U.S. services sector accelerates
Executive summary:
- The U.S. services sector expanded by more than anticipated during September
- U.S. job openings are showing signs of stabilising
- Consensus expectations are for Q3 earnings growth of around 5%-6% for the S&P 500
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin examined the current state of the U.S. economy and outlined key investor watchpoints ahead of third-quarter earnings season.
U.S. services sector expands at faster-than-anticipated pace
Lin began by assessing the health of the U.S. economy in light of the latest batch of economic data. “The U.S. economy still looks resilient–the sky is not falling,” he remarked, noting that the services sector expanded by more than expected during September.
Lin explained that the Institute for Supply Management’s (ISM) non-manufacturing PMI (purchasing managers’ index) rose to a reading of 54.9 last month, versus consensus expectations for a reading of 51.7. A reading above 50 indicates expansionary conditions, while a reading below 50 indicates contractionary conditions. “This was a significant outpacing of expectations in the services sector,” he stated, adding that the new orders and production subcomponents of the index also grew more rapidly in September than in August.
On the other hand, the ISM’s PMI for the manufacturing sector remained in contractionary territory in September with a reading of 47.2, Lin said–matching what was observed in August. While this marked the sixth straight month of contractionary conditions in U.S. manufacturing, Lin explained that it’s important to understand that the U.S. is much more of a services-based economy today. Approximately 75% of U.S. GDP (gross domestic product) comes from the services sector, he said, compared to only about 12% for manufacturing.
Focusing in on the nation’s labour market in particular, Lin said job openings are showing signs of stabilising while the layoff rate remains relatively low.
Key investor watchpoints for Q3 earnings season
Lin finished with a look ahead to U.S. third-quarter earnings season, which begins the second week of October. He said consensus expectations call for earnings growth of around 5% to 6%, year-over-year, for the S&P 500. “This would be a step down from the 11% earnings growth seen during the second quarter, but it would still be a relatively healthy number,” Lin remarked. In addition, it’s possible that the final third-quarter earnings growth numbers could come in higher than the start-of-the-quarter estimates, he remarked, noting this occurred in prior quarters.
Earnings calls will be some of the key watchpoints for investors, Lin said, as they could provide clues about consumer spending trends. In addition, companies may also offer some guidance on what they expect to see during the upcoming holiday season, he said, explaining that this could be an important barometer of economic activity.
Peering ahead into 2025, Lin said the industry consensus for the S&P 500 is earnings-per-share (EPS) growth of around 15% year-over-year. “From my vantage point, this number is a little bit optimistic, especially since the risks of an economic slowdown in the U.S. haven’t fully dissipated. Ultimately, we believe that with sentiment being directionally overbought and U.S. equities somewhat overvalued, investors may benefit from sticking close to their strategic asset allocation, rather than chasing into equity-market momentum,” he concluded.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.