“Piglet noticed that even though he had a very small heart, it could hold a rather large amount of gratitude.”

A.A. Milne #gratitude #thanksgiving #piglet #aamilne #winnethepooh #happythanksgiving

The market has been on a wild roller coaster ride since our last publication on November 5, 2025. First the DJIA rallied 1,343 points in four consecutive sessions and then fell 2,163 points in the next four sessions. A lot of factors triggered this volatility but primarily it was linked to the changing expectations for a fed funds rate cut at the upcoming December FOMC meeting. At the risk of oversimplifying the market, it is obvious that investors feel safe to buy stocks when the Fed is dovish and lowering interest rates. But Federal Reserve Jerome Powell’s comments in mid-month suggesting a rate cut in December may not be guaranteed was a blow to this sense of safety. As a result, the consensus expectation for a December rate cut fell from 90% to 30% and has since rebounded to 82%.

What we noticed when we updated our files this week was that despite all the volatility in the stock market, the popular indices are where they were before we left for vacation. Technical indicators are also little changed, though a bit weaker than in early November. And economic data has also shown little change. Overall, economic data reveals no signs of a recession, but labor and housing markets are weakening.

Perhaps the most important data release was the delayed report on September payrolls. While the headline increase of 119,000 jobs was better than expected, the underlying data suggests something much weaker. BLS revisions indicated August payrolls were lower by 26,000 jobs, which means August payrolls declined by 4,000. July payrolls were revised down by 7,000 jobs. If one adjusts the September payroll for this revision of 33,000 jobs it meant there was a net gain of 66,000 jobs in September. Moreover, most job gains were in healthcare and leisure & hospitality, and many sectors had job losses. The unemployment rate rose modestly to 4.4%, because even though unemployment rose significantly in the household survey, the civilian labor force also rose. See page 4.

Keep in mind that November’s employment report will be released by the BLS on December 16 and there will be no October report. However, this means there will not be any more job data prior to the next FOMC scheduled for December 9-10, 2025.

September’s job report is important because it will be the last report before the next FOMC meeting and because the BLS indicated that survey responses were better than average. This implies that the data should also be better than the recent norm. In our view, the best test of strength of the labor market is defined by annual growth in jobs. Therefore, we measure the year-over-year growth rate of employment in both the establishment and household surveys. The establishment survey showed jobs increased 0.8% YOY in September and the household survey had an increase of 1.14% YOY. Both were below their respective long-term averages of 1.7% and 1.5%. The good news is that BLS surveys continue to show job growth, the risk is that both rates are decelerating. A negative growth rate in employment is the definition of a recession. Our fear is that once the BLS makes its annual adjustments to the data (scheduled for January’s report released in early February), it could show that job growth has already turned negative. (Note: recessions are usually identified retroactively.) Given that this is a risk, we believe it would be prudent for the Fed to lower rates again in December. See page 4.  

The 3-month average of job growth rose from 18,330 to 62,330 in September. However, BLS revisions have been consistently negative which may bring this average back toward zero with November’s report. This is another concern since a negative 3-month growth rate has also identified recessions. See page 5. Also note that while the unemployment rate for college graduates is consistently lower than the broader unemployment rate, September’s college graduate unemployment rate of 2.8% is the highest in four years.

The JOLTS report has become widely followed by economists even though it lags regular employment data by a month. The JOLTS report for August showed the job opening rate was unchanged at 4.3%, but the separations rate fell 0.1 to 3.2% and the hiring rate fell 0.1 to 1.9%. See page 3. In short, the pace of hiring is declining, and workers are holding on to current jobs. All in all, the data points to a weakening labor market.

The ISM manufacturing survey for October was down slightly; however, employment and new orders were up for the month. The ISM nonmanufacturing index rose in October from 50.0 to 52.4 with the strongest increases seen in business activity (49.9 to 54.3), new orders (50.4 to 56.2), and employment (47.2 to 48.2). The small increases seen in the employment components of both ISM indices lifted the total ISM employment index back into normal range. This is reassuring since both July and August showed this indicator in negative territory. See page 6.

The NFIB small business optimism index fell 0.6 points in October to 98.2. The decline in the survey was due primarily to a drop in actual earnings which fell from minus 18 to minus 25. Actual sales changes also fell from negative 7 to negative 13. Meanwhile, the uncertainty index declined from 100 to 88. This was an improvement and was the lowest uncertainty reading this year. There has been a strong historical correlation between the unemployment rate and poor sales for small businesses. Both have been rising in recent months, which is another warning sign for the economy. See page 7.

The PPI report for September revealed less inflation than expected and this sparked a market rally. The PPI for finished goods was up 3.3% YOY, the core PPI for finished goods was up 2.85% YOY, and the PPI final demand index was unchanged at 2.7% YOY. Note that all these results are favorable when compared to the PPI’s long-term average of 3.2% YOY. We remain optimistic about longer-term inflation as long as the price of oil remains below $60 a barrel. With oil prices down 13.5% YOY in November to date, and negative on a year over year basis since July 2024, we doubt that there is a worrisome inflationary cycle ahead. Most economists should know this, yet inflation fears continue to plague consumer sentiment. See page 9. In sum, economic data shows little inflation averaging around 3%, job growth declining, the housing market decelerating, and consumer sentiment at recessionary levels. Yet despite all this gloom, the earnings picture is robust. According to S&P/Dow Jones data, the S&P 500 earnings gain over the last 12 months is 12.9% YOY, far better than the 75-year average of 8.1% YOY. See page 10. And the 12-month forward earnings yield for the S&P 500 is 4.6%. When coupled with a dividend yield of 1.2%, this 5.8% total yield is quite attractive relative to the 10-year Treasury bond yield of 4.0%. We continue to believe that analysts have underestimated both GDP and earnings growth for this year and into 2026. While the S&P 500 index is up 15% year-to-date, earnings are also up 13%, and this means that there has been little multiple expansion this year. We remain a buyer of stocks on dips.     

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This will be the last US Strategy Weekly until November 25, 2025. Dudack Research Group will be on vacation.

To date, 2025 has not followed traditional seasonal patterns, which is an interesting thought as we move into what tends to be the best period of the year on a seasonal basis. According to the Stock Trader’s Almanac, the first week of November is usually a good time for equities. And since 1950, November has ranked as the best performing month for the S&P 500 index, followed by December, which is the third best performing month. November has scored an average gain of 1.87% since 1950, with December averaging an increase of 1.43%, just behind April’s 1.47%.

However, some of Wall Street’s top executives, including Goldman Sachs’ David Solomon, Morgan Stanley’s Ted Pick, and Citadel’s Ken Griffin, triggered one of the biggest one-day declines in a month this week. Speaking at the Global Financial Leaders’ Investment Summit in Hong Kong, they cautioned that equities could see a 10-15% correction over the next year due to stretched valuations. Not long ago, JPMorgan Chase CEO Jamie Dimon warned of a significant stock market correction in the next six month to two year timeframe, citing factors including geopolitical tensions. These CEOs are not alone, many people are warning about the possibility of a stock market bubble; however, these warnings are not the characteristics of a bubble top. In fact, it is quite the opposite. Bullishness tends to be very high at the top of a bubble market.

In short, the weakness seen in equities this week is good news. So is the article in the Wall Street Journal regarding Yale Professor Robert Shiller’s valuation model. Shiller’s tool, called the CAPE (Cyclically Adjusted Price Earnings) PE ratio looks at 10 years of earnings and adjusts them for inflation to cover an entire business cycle. As the WSJ noted, this PE recently broke above 40 for only the second time in history. The previous time being the 1997-2000 bubble period. See page 7.

This sounds ominous but it is worth noting that the current 10-year period in Shiller’s model includes the weak earnings seen during the pandemic. The economy was totally shut down. The sharp decline in earnings in 2020 explains why Shiller’s earnings base is low and the CAPE PE looks higher than average. But the main criticism we have of Shiller’s CAPE PE at this juncture is that the business cycle of the last 10 years may not be representative of the upcoming ten years. AI is one reason we expect efficiency and margins to improve. Another important factor in terms of earnings power is that this administration has instituted a tax policy that allows full depreciation of capital expenditures in the taxable year. This is true for businesses large, small, and entrepreneurial. Not only does this inspire more business investment, but it improves economic activity and earnings growth. A third factor is that President Trump’s tax policy should lower taxes for middle income households, suggesting more consumption and economic growth in future years. In our view, the next ten years may not be comparable to the last ten years; yet this is the basis of the Shiller model.

Last, but far from least, even if the CAPE PE proves to be a useful valuation guide, keep in mind that earnings have been far better than expected in 2025. This week the S&P Dow Jones consensus earnings estimate for calendar 2025 was $261.56, up $3.70 for the week. The earnings forecast for 2026 was $304.11, up $1.52. Similarly, the LSEG IBES estimate for 2025 is $268.01, up $0.62, and the 2026 estimate is $305.36, up $0.33. The IBES estimate for 2027 is $348.17, up $1.19. And though PE multiples are rich, the forward earnings yield of 4.5% and dividend yield of 1.2% is competitive to a 10-year Treasury bond yield of 4.1%.

Perhaps the most compelling factor in terms of earnings is that the 12-month sum of operating earnings currently shows a gain of 12.0% YOY, which is 48% higher than the 75-year average of 8.1% YOY. See page 5. The bottom line is that valuation models that are based on historic earnings may look stretched, but earnings growth continues to surprise to the upside. Moreover, we expect this trend will continue for several quarters or years to come. This means that as equity prices move higher, earnings are also rising, and as a result, PE’s have remained relatively stable in 2025. And for those who worry that the equity market is in a bubble, note the current S&P 500 trailing operating PE multiple is now 26.2 times, which is rich, but at recent market tops, or at the 2000 peak, this trailing PE was at least 30 times earnings. If the market were to reach 30 times our 2025 earnings estimate of $270 it would take the S&P 500 to 8100. In short, it is too early to be bearish, even if a bubble is forming. 

And while we sense a wave of pessimism regarding financial markets, it is important to remember that the biggest problem that faced the US in 2025, in our opinion, was runaway deficits. The potential growing supply of Treasury debt hung heavily over the credit markets. In this regard, it is noteworthy that this week the US Treasury Department revised its borrowing estimate for the current quarter to $569 billion, down from $590 billion, due to a higher starting cash balance. Secretary Scott Bessent has been a proponent of President Trump’s tariff policy as one of several methods to raise revenue and lower debt. Bessent has stated that his goal is to get the annual deficit to GDP ratio back to the normal 3% level from the unsustainable 7% level seen at the end of January 2025.

In short, we remain long-term bullish and believe there may be a correction of 10% or more ahead, but it is more likely to materialize in the first quarter of 2026. In the meantime, we would be buyers of dips.

There is little economic data available this week due to the government shutdown, but ISM surveys are reporting. After rising to 49.1 in September, the ISM manufacturing index returned to 48.7 in October. Several financial headlines noted that this ISM index has been below the 50 level — in contraction — for eight consecutive months. This is true; but more importantly, the index has been under 50 for 33 of the last 36 months, not just this year! In other words, 2025 was not a new deceleration in the manufacturing survey but simply a continuation of the trend seen over the last three years. The details for September were mixed, but the production index was one of the weakest factors, falling 2.8 points to 48.2. Employment rose 0.7 to 46.0; still, the index continues to languish below the 50 breakeven level. See page 3. The ISM nonmanufacturing index will report later this week. There were signs of weakness in several technical indicators this week. In particular, the 10-day average of daily new highs and daily new lows tends to define the trend. This week the number of daily new highs fell to 330 while the average of daily new lows rose to 114. This shift has moved this indicator from bullish to neutral. At least 100 new highs per day are deemed bullish; conversely 100 new lows per day are a sign of a bearish trend. The current combination is mixed. Our 25-day up/down volume oscillator is at minus 0.20 this week, down a bit, but still neutral. This indicator should reach overbought on each new market high to indicate that the volume in advancing stocks exceeds volume in declining issues. However, the last overbought confirmation seen in this indicator was in July. The absence of an overbought reading for nearly four months is a signal of a potential correction

Gail Dudack

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