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Equities experienced a broad-based gain, with small-caps outperforming large-caps and several US equity indices seeing gains of around 2%. The “Magnificent 7” rose by 1.8%, while the S&P 500 increased by 1.9% to reach 4,318. The 10-year US Treasury yield also declined by 10 basis points to 4.66%, providing relief for equities in a slowing economic environment.
Despite disappointing sales forecasts from Apple for the holiday quarter, equities were expected to hold onto their gains. The Federal Open Market Committee (FOMC) expressed its commitment to proceed cautiously with rate decisions, acknowledging that further rate hikes were possible but also noting that “tighter financial conditions” would impact the economy.
Equities had been on the defensive since reaching a peak in late July, with a variety of factors contributing to this weakness. Resilient US economic data and rising yields on longer-duration Treasuries added to the decline in the S&P 500, satisfying the common definition of a correction. The possibility of a final rate hike before the end of the cycle and increasing US government issuance leading to rising yields on longer-duration Treasuries created a headwind for equities. Additionally, some disappointments from mega-cap tech and growth companies in the third-quarter earnings further contributed to the weakness.
However, the recent rebound in equities suggests a more positive outlook. The Federal Reserve’s meeting on November 1 added to hopes that the tightening cycle may already have been reached, with the tone of the accompanying statement appearing more balanced. The US Treasury’s decision to slow the growth in issuance of longer-dated bonds also interrupted the upward momentum in yields. This shift, along with signs of cooling in US economic data, has improved sentiment and supported the view that rates are near a peak.
Overall, while equities faced challenges in recent months, the recent rebound and improved sentiment on several fronts indicate a more positive outlook for the future.