David Kelly
Chief Global Strategist
Published:
This article, while nominally titled “Notes on the Week Ahead”, usually detours almost immediately into other issues. However, since we’ve entered what Chairman Warsh describes as an “information-rich” period, it is worth taking a look at just what markets are likely to learn from the data and events of the next few days. Obviously, all data points are not created equal, so here are some of the more important:
Monday sees the release of the ISM survey of U.S. manufacturing purchasing managers and a separate set of purchasing manager indices from around the world. These numbers should provide some indication of both momentum in the manufacturing sector and inflation pressures due to the Iran conflict, tariffs and very strong capital spending on AI. However, investors will also be looking at the government’s report on September construction spending. Data centers are reported within the office category and now, in fact, dominate that category. In August, nominal construction spending on data centers amounted to $85 billion at an annual rate, up 73% year-over-year. A key question is whether this extraordinary momentum can continue, even as the funding of this buildout is contributing to volatility in both the stock and corporate bond markets.
On Tuesday, America heads to the polls for the midterm elections. While waiting for the results, investors will be able to ponder numbers on vehicle sales for October and job openings for September.
Industry estimates of October seasonally adjusted and annualized light vehicle sales range between 15.6 and 16.1 million units. Gains in wealth and income among the most affluent households have allowed the new vehicle market to remain resilient in the face of higher gas prices, higher interest rates, higher tariffs and lower trade-in values for used vehicles. That being said, all of these forces, combined with weak demographics, are likely to weigh on the auto market going forward. Vehicle sales are the most volatile major part of consumer spending and a flat 16-million unit pace sustained into the fourth quarter and beyond would act as a mild drag on overall economic growth.
Tuesday’s report on job openings for September will help provide a preview of the October employment report, due out on Friday. Overall, the picture should remain one of relatively low hiring and firing, due to a lack of available workers and moderate economic growth.
On Wednesday, all eyes will be on the results of the mid-term elections. Pre-election polls suggest moderate gains by the Democrats across the House, the Senate and state and local governments.
These elections could have a significant impact on the economic and financial landscape, particularly over the next two years. Indeed, that is probably what the Federal Open Market Committee was thinking about when it defended taking no further action on interest rates last week pending “the accumulation of more information”.
If Republicans hold their majorities in both the House and the Senate, the President would regard it as a major endorsement of his agenda. On the campaign trail, he has promised that he would give a $5,000 check to every adult U.S. citizen, if this was the election outcome. While $5,000 checks are unlikely to be approved, even by a Republican Congress, it is quite possible that some further tax cuts or fiscal stimulus could be enacted ahead of the 2028 presidential election - if Republicans still control both the White House and Congress.
If Democrats achieve a majority in the House, as now seems probable, further fiscal stimulus is unlikely, unless the economy falls into a deep recession. While some Democrats might be in favor of further fiscal stimulus, they would very likely balk at passing any such legislation that was not funded by higher taxes on the rich or corporations. We expect that, even with Democratic control of the House, a compromise would be wrought to increase the debt ceiling in late 2027 or early 2028. However, beyond this, there could be temporary government shutdowns due to wrangling over the budget.
A Democratic House would likely put greater pressure on the Administration to wind down the Iran war, since it would exercise considerable power over the funding of that war. In addition, if tariffs were seen as costing Republicans votes in the mid-terms, it is possible that a bipartisan effort might be launched to restrict the power of the President to impose tariffs. That being said, such an effort, or indeed, any other legislation emanating from Congress would face significant hurdles since the President could veto such legislation and Congress needs a two-thirds majority in both houses to override any presidential veto.
Much of this also applies if the Democrats achieve the net gain of four seats needed to control the Senate after Tuesday, a scenario that, as of today, seems like a very close call. Control of the Senate, in addition to the House, would further reduce the power of the President, since a majority in the Senate is needed to confirm Supreme Court justices, replacement members of the cabinet and members of the Federal Reserve Board of Governors. In this scenario, Jerome Powell might feel comfortable that the independence of the Federal Reserve is no longer threatened and that he could retire before his full term expires in January 2028.
It is also possible, that, if the Democrats win control of the Senate on Tuesday, one or both of the oldest justices of the Supreme Court, Clarence Thomas (aged 78) and Samuel Alito (aged 76) could retire to give the President the opportunity to nominate conservative replacements before Senate control changes hands on January 3rd, 2027.
We’ll be holding webcasts on these and other implications of the midterm elections this Wednesday at 6:00AM, 11:00AM and 8:30PM (all Eastern Standard Time) for financial advisors and institutional investors in Europe, the Americas and Asia, respectively.
Wednesday will also see the publication of global PMI data for services and composite PMI data for manufacturing and services combined. In September, the composite global PMI index hit a 40-month high of 54.3. We estimate, based on flash PMI data from a number of the largest economies, that the index in October fell back to its August level of 53.5. While this would reflect weaker numbers from the U.S. and the eurozone, it still indicates remarkable global economic resilience in the face of higher energy prices, negative demographics and U.S. tariffs.
On Thursday, the government will release new data on jobless claims and productivity. Initial jobless claims are likely to remain at a low level, partly due to labor shortages. Productivity numbers will be more interesting, as they will reflect both what happened in the third quarter and also GDP revisions over the last five years that were released in late September. We believe the data will show a healthy 1.8% year-over-year increase in real output per hour in the non-farm business sector. In addition, recent wage data suggest that labor compensation rose only 2.9% over the same period. This nets out to a very mild 1.1% year-over-year increase in unit labor costs, (that is to say, the labor cost in producing a unit of output), suggesting that labor costs are actually pulling inflation down to the Fed’s 2% target.
On Friday, the Bureau of Labor Statistics will release the monthly jobs report for October. With only moderate weather disruptions and virtually no strike disruptions in the data, we expect a moderate bounce-back from a weak September report, with close to 100,000 jobs added and the unemployment rate edging down to 4.1%. Importantly, we expect year-over-year wage growth to be unchanged at a mild 3.0%, representing a seventh consecutive month in which, on a year-over-year basis, average hourly earnings have grown by less than CPI inflation.
Also 140 S&P 500 companies will report earnings in the coming week. Through last Thursday, 263 companies, representing 54% of index market cap, had reported, with 80% of them beating expectations. Our tracking model now suggests that pro-forma operating EPS will rise by a sparkling 27% in 3Q2026 – a third consecutive blockbuster quarter for earnings growth.
These earnings gains are central to continued economic growth, as they are funding capital spending, restraining credit spreads and supporting stock prices. For investors, however, it is important to continue to find ways to diversify beyond the superhot AI theme. While this week’s election results should reduce political uncertainty and the baseline forecast remains one of moderation in economic growth and inflation, there is a continued potential for political, geopolitical or financial shocks that would, most likely, impact the most speculative areas of markets which many investors may now find over-represented in their portfolios.