Making Sense: November Market Update

Making Sense

Monthly Market Update

Recorded November 20, 2025

Amy: Hi, I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Thursday, November 20, 2025, and I want to welcome you to our monthly Making Sense: Market Update series. Today, Phillip Neuhart and Blake Taylor will take a deep dive into markets and the economy. 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. This should not be considered as tax, legal or investment advice.

Phil: Hello, everyone. Thank you so much for joining us today. And, Blake, thank you for filling in for Brent today—really pleased to have you. You do so much work on all of our research, and you're an excellent addition to the team. So happy that you're here to go through some content with us.

Speaking of content, what are we going to cover today? One, the economy. There's a lot going on. All eyes on the Fed, inflation, the labor market and in fact, just today, we received some fresh labor market data—although fresh might not be the right word. We'll dig into that. Consumer, of course, is very important as well.

On markets, as usual, we want to talk about equity markets—a little bit more on valuations and some of the things we're seeing under the hood there—and fixed income as well. So Blake, why don't you jump into what we're seeing in the economy?

Blake: For the last several months, the entire global developed market has been in a rate-cutting cycle, and that's really been one of the defining features of global markets. It's easier credit, lower interest rates and what is interesting is the US has, if anything, been a little bit behind the curve in terms of how much and how quickly we've been lowering interest rates. So looking across the UK, Europe, Japan, Canada, all those countries except for Japan have cut interest rates sooner, but what's different in those countries compared to the United States? Lower growth and lower inflation.

Phil: Right.

Blake: So for years between the pandemic and maybe 2023, 2024, interestingly, global developed markets' central banks all kind of moved in tandem. They all jacked up rates. They all left them on hold. They all started cutting initially.

But now it's been 4 or 5 years, and countries are starting to go sort of their own separate ways. And something that's setting the US apart compared to the other largest-developed market economies is that our economic outlook has been stronger—looking at about 2%, maybe even 3% GDP growth in some quarters, whereas a lot of those other countries, particularly in Europe, we're looking at just about 1%.

Unfortunately, on the other side, maybe a result of a little bit of a hotter economy, maybe a result of other changes, the US is also running at about a 3% inflation rate, whereas those other countries are running at about 2%.

But what's interesting—and the reason why we drew this chart here—is we can see that there are very clear periods where the entire global market is in an easing cycle or a cutting cycle or, in other times in a hiking cycle. We're very clearly in one of those cutting cycles right now.

Phil: Yeah, easing is certainly the story right now globally.

Blake: And that's been the case, looking just to the United States here. We have—for over a year, going on 2 years—the market has been anticipating 12 months ahead, easier policy. So what we're showing here is that each of these dates along the bottom of the chart, looking 12 months ahead, what has the market priced for a change in the Fed's policy rate? So go back to the summer of 2021, the market started to price in 12 months after that, we're going to see about a 3-month increase in the fed funds rate.

That stopped when—in early 2023, actually. That's not when the rates came down. But that's when the market started to anticipate easier rates. And so it's been over 2 years that the market has anticipated lower rates going forward, and that's still where we are now.

So this is just a different way to think about and to look at the level of the interest rate, which very much matters, but when we start to think about what's coming down the pipeline in the future, we are still in a place where markets are looking for easier policy.

We think that that matters very much for the economic outlook, for the corporate spending outlook, and then, of course, for equity markets as well.

Phil: Yeah. And we're seeing in fixed-income markets as well. It really does appear to be playing out, at least in the shorter part of the yield curve.

So what are we seeing in the labor market? Today, in fact, we did receive a September non-farm payrolls report and the unemployment rate as well. That, of course, is really lagged because of the government shutdown. The 3-month moving average of employment gains, as you can see on the left side, did tick up, and that is because the September data showed over a 100,000 job gains. A real surprise to the upside, but we saw negative revisions to prior months. That's become a theme of late, Blake, something that's been talked a lot about by market participants, and we saw August turn slightly negative.

That's not shown here because it's a 3-month moving average, but it is something that I think, as we move over coming days, the market's going to have to contend with.

Blake: That second-to-last bar, you can barely even see it because it's so close to zero.

Phil: It's so close to zero. So I would describe it as kind of a mixed report. And to that point on the right side, the unemployment rate did tick up again. So is 4.4% low by historic standards? It is, but we sort of had flatlined in the low fours, right, and now we're ticking up again. So this is becoming very interesting, and we don't receive another employment report until after the next Fed meeting, right, Blake?

Blake: Right, and that'll be in mid-December. Usually, the unemployment rate comes out in the first week of the month. But because we're still going to be dealing with lagged data collection, that's going to come out in mid-December after the Fed meeting, and that'll actually be for October. So we are—the analysts and markets and policymakers—have all been flying blind here in terms of latest data.

Phil: And it feels like we kind of are still, right?

Blake: Definitely. That data that we just got half an hour, 45 minutes ago, that was for 2 or 3 months ago, right?

Phil: Right. That's right.

Blake: And I wanted to make one more point on this unemployment rate chart that you were just talking about. One of the biggest themes for really the last couple years—ever since the unemployment rate bottomed out at a very low level and then it started to move up—a lot of people in the economic analysis and forecasting world were saying, "Once the unemployment rate starts to go up, rarely does it really stop."

And that's why people were really hesitant around the economic outlook and even the market outlook for a little while because the unemployment rate was moving up. But what has happened for the first time is it really kind of flattened out.

Phil: And you could see that before this month's tick up—that flat moved sideways.

Blake: And the other thing that we have never actually seen before with that series starting to tick up is that we haven't seen one of these gray bars coming right after that, which indicates a recession. So with the unemployment rate going up by over a tenth to 4.44% this morning, I think a lot of people are really going to continue to be thinking even more closely about the labor market as this whole picture just starts to get a little bit murkier. Last year, we had really strong earnings, really strong economy, really strong labor market, and now everything is just seeming a little murkier.

Phil: It's something we've been describing as sort of a muddle-through economy, right? It's an okay economy. We certainly can't describe it as going gangbuster.

And speaking of the labor market, we have some alternative data from Revelio Labs. It's also showing really muted job gains in the gold line here, and you can see the official government statistics with a tick up as well. These are 3-month moving averages, so again, we're smoothing the data.

But really, no matter how you slice it—whether you're looking at continuing jobless claims, recent layoff data, which we're now showing on the next slide—we have a labor market that is softening. Is it absolute deterioration at this point? I think with a job gain of over 100,000 in September, it's hard to say that, but softening I think is where we are.

Here, we are showing Challenger Job Cuts survey, and you can see that after months of us saying, "Look, it looks like there's less demand for jobs, but we're not yet seeing major layoffs." It's something you and I and Brent have been saying for months on end—we can no longer say that.

The truth is we're seeing it in company announcements and we're seeing it in the Challenger data. Is it recessionary yet? I would not describe it that way, but certainly companies are making some decisions around labor market.

Blake: And it's important when we look at this 1-month shoot up in the number of job cuts in October, it's important to continue to think about not putting too much stock in 1 month of data.

Phil: Absolutely.

Blake: So even though we have heard anecdotes for months about a softening labor market, we've been saying, "Well, we're on the lookout for job cuts, and we haven't seen that, and that's something that's made us feel a little bit better."

So when we did see this this number that morning when it came out, you and I in the office said, "Well, there's another data point in that direction." But for months here and there in the last few years, we have seen analysts in the economy, even the market, kind of getting swung back and forth by putting too much emphasis on one data point, and that's the balance in analyzing economic data is you don't want to be behind the curve and dismiss something important, but you also can't lean too much into 1 month of data.

Phil: And you could argue with how the equity market has traded this year is that it is looking through some of it. It's easy for folks like us, some analysts, to get caught up, but market participants have looked through some of the noise. Speaking of market pricing, what about market-implied probabilities of interest-rate cuts?

Blake: When the Fed cut rates in both September and in October, futures markets were looking for another rate cut in December.

Phil: So basically assumed.

Blake: Yeah, that'd be three this year. And that's a pretty typical adjustment cut for what the Fed would do when they come back to the market and they say, "We’re recalibrating the interest rate. We've seen what's going on in the labor market and prices. We're going to make a small adjustment. That might be three rate cuts."

What has happened in the last few weeks—probably with realizing that we're not going to be getting solid, reliable economic data—is the tension between people who are more focused on potentially a softening labor market, and then the policymakers who are more focused on worrying about inflation. Without reliable information, that tension has really increased. And what has happened is markets in just the last couple weeks have taken that and they have reduced their confidence substantially in the probability, in the odds of a rate cut in December. That, as you can see on this graph, it's now fallen to about a one-in-three chance, down from a 100% just a month ago.

So really going to have to see what the Fed tells us in next few weeks.

Phil: And really, in lieu of it being pretty clear in Fed official speeches, we do think that we still have a vacuum of data. Things like initial jobless claims, the stuff we are getting is really going to move this probability around, is our suspicion.

Blake: It is, and there's too much that you can look at to tell your own story. Something we joked about upstairs just a few minutes ago was, you can look at the screen with all these new data points and almost like choose your own adventure. "Do I want to follow the jobless claims data? Do I want to follow the payrolls data?" And that's where we're getting this tension between what policymakers are saying.

So if you give me a minute, I'm going to show one of our most complicated exhibits that we're going to present this morning. And what this is is the Federal Reserve's so-called policy rule of how restrictive or how easy do they want to set the federal funds rate.

And what we have here is the first line that we're showing is the actual fed funds rate over the last 5 or 6 years. The second is if you use a statistical model and you take inflation and employment and GDP growth—what does that say that the policy rate maybe should be based on this model? And what we saw, as we all know, back in 2021 inflation was shooting up, economic growth was accelerating and the Fed kept rates very easy. So what we see, you see that dark blue solid line still at zero all the way into 2022, but the statistical model is suggesting by 2021, the Fed maybe should have considered taking that rate up.

Phil: And it's basically accepted now that the Fed was late.

Blake: Yes.

Phil: Right? It's generally accepted.

Blake: There's all kinds of pros and cons of what came from that. People outside this room can debate what the right course of action was, but a lot of people do think that. And that's what we can see in this gold series down below. That's just the net between these two lines.

So that period where the gold bars are well below zero, that means that the Fed's actual interest rate—the policy rate—was much easier than what the statistical model implied. The reason that we wanted to show this now is that what we're hearing from Fed policymakers is we're hearing a lot of policymakers saying the rate's restrictive. It's holding back economic growth. Particularly, it might be impairing the labor market at a time where we're seeing really weak job growth and unemployment rising.

But the challenging thing is we all know that there's no way to dial these two numbers in specifically. This isn't physics. This isn't a hard science. If we're getting close, then that's a big win. And that's what I'm seeing here in this graph is we have the actual fed funds rate and what the statistical model is suggesting really close to each other.

So this is part of why Fed policymakers, just in their minutes of the last Fed meeting that were released yesterday afternoon, those minutes said there's strong disagreement between policymakers on the right course of action. And this is a pretty new phenomenon in terms of setting the monetary policy in the US in really the last many, many years that we're starting to see a clash on what the right course of action is.

Phil: December could be really interesting. I mean, it's going to be something that market participants outside of a real telegraph through speeches or the press, it could be a really interesting meeting. What about financial conditions, Blake?

Blake: Yeah, so one of the main things that the Fed is taking into account when it's deciding what's the right interest rate to set isn't just how it feeds through to bank loans and to mortgage rates, but how does it affect the broader financial system and the broader ability for households and particularly businesses to obtain financing if they need it? And we can compile all kinds of indicators like equity prices, 10-year Treasury yields, credit spreads, the dollar, into an index which is assembled here called the Financial Conditions Index. And when that is moving lower, what that tells us is it's easier for big companies to obtain financing.

Conditions are supportive of future economic growth because companies are able to issue debt, issue equity, get a loan. And what we're seeing is over the last several months with the Fed indicating that they are lowering rates, we've seen financial conditions move into one of the easiest periods in the last few years. So this is something that a lot of policymakers are taking into account when they're thinking, "How restrictive really are conditions right now?" It's definitely possible to make the argument that this is an economy and a financial system that is not crying out for easier policy right now.

Phil: That's right. And when you think about that dual mandate of full employment and price stability, we talked about the labor market—I think safe to say softening, maybe not deteriorating sharply, but softening—but the other side, the dual mandate of price stability, we are still seeing inflation. Inflation is trending about 3%.

Now if we want to be very literal, the Fed's target is 2%. We're 50% above target. Of course, you know, we and our team try not to take things quite so literally because we know we were at 9%, right? And so the fact that the Fed has made adjustment cuts to this point really is a huge improvement.

But nonetheless, it is very difficult to say, "Well, inflation is solved." And by the way, I have the pleasure of spending a lot of time with our clients and prospects. They definitely don't think inflation is solved. People are still very frustrated with inflation.

This is an issue for the Fed. So when you're talking about the probability of the December cut and it really being a coin flip—or maybe less than a coin flip—this is why, and it's going to matter for 2026. So let's talk inflation expectations. If you look at household inflation expectations on the left side, you can see next year well above next 5 years.

This is surveying folks, and again, this is not science, right? This is people's perception. And by the way, the perception, as I just said, on the road is that inflation is really high.

I tend to lean a little bit more towards market-based inflation measures, and the reason is is that this is a little bit more science. It's still perception, but it's a little bit more science, not survey-based as much. What you'll notice there is that the 1-year inflation expectation has fallen quite a bit after rising earlier this year over particularly fears around tariffs, right?

And I think what we've seen is that, yes, we see evidence of tariffs in a lot of goods prices. We just saw the administration adjust certain food tariffs last week. So certainly, we are seeing those expectations come down, but still above 2%. And we look at 5-year, 5 year, which is a fancy way of saying 5-year expected inflation in 5 years—another way to say that is long term. Long-term inflation expectations, again, not out of control, and I think the Fed actually gets some solace from this, but slightly above too.

The truth is, if inflation trends to that 5-year, 5 year number, there probably is some room for the Fed to cut further. But that's just not where we are today.

Blake: Something that we chose to put in here for kind of a bigger-picture look on where we are with the economy and maybe the cycle, if you want to think about it that way, is the move up in the number of Chapter 11 bankruptcies that have been filed in US courts over the last 12 months. And as you can see, between 2023 and now, that number has moved up a lot. It's moved up by like 30% to 50%, depending on how you cut it. So that's a huge increase in the number of bankruptcies.

But look at the level. Over the last 12 months, we are still below the number of bankruptcies that are being filed in 2019, which some could argue right before the pandemic was one of the strongest economies and markets and conditions for conducting business in history. So the reason that we wanted to show this was to show a little bit of a story and make the argument that we unfortunately can have a deterioration in a lot of trends that still keeps us at a solid level.

Phil: Yes.

Blake: So think about also delinquency rates. Unfortunately, delinquency rates have risen substantially for some types of loans among some borrowing cohorts, but by a lot of those measures the actual rate is consistent with longer-term averages or even just periods before the pandemic.

So it's important to remember that the economy and the labor market and credit conditions in 2021 and 2022 were just really hot, red hot in some ways. It was never going to stay that way.

Phil: Right. In some ways, I look at this chart and say we moved just a little bit closer to normal.

Blake: To reality?

Phil: We had massive fiscal and monetary stimulus, and consumers and businesses were flushed with cash. That's a short-term phenomenon during and immediately after the pandemic. This feels a little bit more of a return to normal. We're going to talk corporate earnings later, but when you hear folks say Corporate America looks pretty healthy, this is what they're talking about, right?

This is the push and pull for markets. You can say the unemployment rate ticked up, but earnings growth looks excellent, and bankruptcies, yes, they've moved up but are below where they were in 2018, 2019. It's just not a shocking result.

Blake: The last thing that we would ever want to do is be dismissive of households and institutions' concerns and experiences with and regarding the economy. But the reason that we look at a lot of this data is to put what we're experiencing and seeing and reading into a broader context. And just unfortunately, this is moving in the wrong direction—but still might not be terribly painful.

Phil: And we'll keep an eye on this. Obviously, if we start to see a swing higher, we will update you all. So let's talk about the consumer quickly. We show this data quite a bit. I won't dwell on it for an overly long period of time, but consumer spending on the left side, nominal, quite robust. Of course, that includes inflation, right? And we mentioned it's running around 3%.

So real spending, inflation-adjusted spending, running about 2.7%. By the way, this is 70% of GDP roughly as the consumer. If you told me GDP was going to run at 2.7% for the next couple years, I would take that all day long. So these are not bad numbers.

This is why, though, the labor market's so important, is that we have seen credit card delinquencies go up, auto loan delinquencies go up. We know that higher-income consumers are doing better than lower-income consumers. The labor market is what's going to keep this going, but so far, the truth is the consumer is still spending. What are they spending on? Services. On the right side, this is service spending contribution to personal consumption growth. Services are really the story here.

By the way, about 70% of every dollar the average American spends is on services rather than goods, which honestly always shocks me because you think about, oh, you bought a couch or a car, but the truth is, over the course of a year, think about what you spend on healthcare, education, child care.

Blake: Things you don't even know you're spending money on, probably.

Phil: Rent. It just adds up through time. In lieu of a lot of government data being delayed, we have been watching alternative data. This is a series we've actually watched for many years but have focused in on it again this year given the government shutdown. Here we're showing TSA check-throughs essentially.

So how busy are airports? That's all this is, and you can see we have a line for each year going all the way back to 2021. Looking at 2025, the dark gold line here, we're at record levels—at or above the 2024 level. Again, if we were in recession, say, you know, the first three quarters of this year, this number, in my belief, would not look like this.

I tend to think that, first of all, the NBER calls recessions, you know, a year after recession, but I tend to think I know what a recession feels like in an airport. Now, you see this recent tick down. That is, of course, canceled flights due to the government shutdown. That is a statistical anomaly.

Now, if that starts to trend down on a sustained basis, we will become concerned. But we, of course, are ignoring the fact that we have flight cancellations, which I know affects a lot of our clients and certainly affected our travel over the last month.

Blake: One of the stickiest things to think about and read in the statistics right now is the fact that by polling households and asking them what's their perception of the economy and the economic outlook, it's at record lows.

Phil: People feel terrible, and certainly a lot of that—we've talked about the concept of the K-shaped recovery, right, that we have seen higher-income consumers do well, lower income are really struggling, middle class are really struggling. And that's finding its way into the sentiment data.

Blake: Something that's really important in economic analysis is to balance what we call the hard data and the soft data. The hard data are the GDP statistics, the number on how many jobs are being created, income, spending.

The soft data are surveys asking people, "How do you feel about things? Are you going to expand your business in the next few months?" And by relying too much on one or the other, then you're going to miss the whole picture. So do we need to take this with a little bit of a grain of salt? Probably. There's been a lot of weird things going on in the last few years in terms of people's perceptions. We know that stock prices are at or near record highs. We know unemployment is at a historically very low rate.

But we need to listen to people out there, and with the quality of some data being sometimes a little bit lacking in terms of what we would desire, I think it's important for us to balance really strong, hard data with the fact that people, for some reason, are reporting record low sentiment in terms of the current economy.

Phil: And I can add to that. I mean, this is what I hear certainly on the road.

Even those who are spending because of their stock portfolio or their home value, these positive wealth effects, there's just a lot of frustration. And I think that finds its way in. Consumer sentiment is not necessarily wonderfully correlated with economic growth sciences in terms of leading because the truth is often, folks are mad about things that may not impact the economy, but we do not take this lightly.

So we mentioned this K-shaped recovery, and we've talked about this a lot. The idea that what is pulling up that consumer data I showed a few slides ago are higher-income earners and the wealthier. And I don't mean extreme wealth, really upper-middle and upper-class folks. And one of the things really driving that is the stock market.

So this is the stock market wealth as a share of household net worth—highest it's been ever.

Blake: Probably ever.

Phil: Yeah. Certainly back to this chart that goes before 1950. So what does this mean? Well, we talk about wealth effects. Wealth effects are something we do believe in, right?

Blake: Yeah, about 5 or 10 cents of each dollar people earn in wealth is going to get spent out the door.

Phil: Yeah. You feel wealthier, you tend to spend more. And of course, when we talk upper-middle-class, upper-class folks, they have more exposure to stocks.

Also by the way, these tend to be homeowners, and home price appreciation has moderated of late, but think about what homes are worth now compared to 5, 6, 7 years ago—pretty dramatic wealth creation, and that has helped consumer spending.

So let's turn to the markets now. S&P 500, something you've heard us say many times, has rallied roughly—after today, it'll be over 100% most likely.

Blake: I had to move that down from a 100% to 99% this morning.

Phil: Exactly, wait until we're done trading today. In 2022, we saw a 25% drawdown, over 100% gain since then. And we've seen a pretty—in exaggerated terms—straight line move higher since the 19% drawdown earlier this year. It's easy to forget that we had the tariff tantrum and that the market almost had a bear market just this year, and here we are up well into double digits on the year.

What you'll notice here, of course, is the smoothness of this, and this is pretty rare. And when we think about the market—and we'll talk about valuation in a moment—seeing a bit of a correction over the next weeks, months and quarters would not be shocking to us. If fundamentals persist, it does not mean the market can't move higher, but it's not normal when you look at this chart to go so long without any sort of correction.

Blake: And our equity portfolio colleague, Kyle, actually did the quantitative analysis on this and looked all the way back to 1928. And he found that in the second half of the year, particularly in Q3, the fact that there was such little interruption—

Phil: This year.

Blake: In gains, yeah, was ranked in the 95th percentile of most benign quarters in the history of the S&P 500. So that's the exception.

Phil: So it not only felt benign, it was statistically.

Blake: Well, it's hard to open up your financial press of choice these days and not see the scary word "bubble." And there's a lot of conversation around the biggest theme, maybe, in equity markets now, which is around artificial intelligence. How much is being spent on it? Is it going to give the dividends that we would expect by making such big investments? Is it going to pay off?

And what this is leading to is a lot of flashy articles saying, "Are we in a bubble? We are in a bubble. What's the history of bubbles?" And we looked at the number of articles that are using the word bubble in the headline going back several years, and it has moved up very much in the last year.

But what I would suggest looking at this longer history here is that that's not actually that new of a thing. It's something that the financial press really likes to talk about, so we want to spend some time here thinking about the actual data and the fundamentals.

Phil: Yeah. And before we turn to those fundamentals that I'll cover, just eyeballing some of these past spikes, those are actually great entry points into the stock market. So just be careful. One thing I will say, if everyone thinks we're in an AI bubble—are we, right? I mean, that becomes a question of if it's consensus, then are we actually in one if the stock market is trading near all-time highs? I think that's a real debate. Also, one thing we learned in the 1990s is that, particularly around tech innovation, these things can run much longer than you would think.

As you may have heard me say before, Alan Greenspan gave the famous irrational exuberance speech in which he quote called the tech bubble in December of 1996. The market peaked in 2000. So just be careful assuming that things are expensive, et cetera, and the market's going to move lower tomorrow. That's not necessarily the case.

To that point, let's look inside the S&P 500. If you look at the largest 10 companies, and by the way, these are very AI-related, right? One just reported earnings yesterday. You will see in this blue line here, they are quite expensive versus their own history. Now, there are reasons they're expensive. When you look at profit margins, when you look at revenue growth, it is not as if these companies are not making a lot in terms of earnings. These are remarkable business models, many of them, at least in the current environment.

What's interesting, though, if you look at the other 490, they are not cheap, but they are not all that expensive versus their own history, right? If you really look back over the last decade, they are not that far above average. So when we say the market is expensive, what we're really saying is that the largest companies are expensive, but what have we learned over the last few years? They are expensive for a reason, right? And that is pretty incredible earnings.

So you might say, "Well, okay, are there only 10 good companies in America?" And what we would say is that is not the case. When you look at the market as a whole, over a quarter of companies have gross margins of at least 60%, right?

There is a large share of companies that have really good business models, that make really great return on revenue. So try not to get too caught up in the fact that, well, it's only a few companies that are benefiting. That is not what we're seeing. And when you look at this whole fundamental-versus-valuation debate, you cannot ignore the fact that when you look at the S&P 500, you look at something like price to earnings, right? The price you're willing to pay for a dollar of earnings. The market is expensive, right?

We would not ignore that. But a lot of the move in the market since 2022 is actually accounted for by fundamentals, right? So 48% move higher since the beginning of 2022—of course, that includes the 2022 drawdown and the rally since. If you take dividends and earnings growth, 29 plus 6—that's 35% of that total 48% return is fundamentals, returning cash to shareholders and earnings growth. That's about three quarters.

The other quarter is valuation expansion. In other words, PE moving up. So two things can be true. Fundamentals have driven this market higher as valuation has expanded. Can valuation contract? Absolutely. Valuation, by the way, is not predictable in any way in the near term. In fact, the market was expensive a year ago. If you said that, you were right. And what should you have done?

You should have bought the stock market if you were looking at 1-year return, right? So be careful assuming that it's just things are becoming more expensive. The truth is, there is earnings growth underneath the hood. To that point, Blake, why don't you talk about what we're seeing in estimates, particularly around the earnings season that just finished?

Blake: We just basically wrapped up the third quarter earnings season with the largest company in the S&P 500 reporting yesterday, and analysts think that third quarter earnings grew at over 13% in the third quarter, well above the longer-term historical average.

Phil: And by the way, coming into earnings season, the expectation was about 8%. So we're talking about a blowout quarter.

Blake: Already from a pretty strong base of what was expected. And for the full year, bring in just Q4, then analysts are looking for 11.7% earnings growth year on year. And adding to that, for next year—which is still a ways out and there's a lot to be seen—but analysts are expecting another very strong quarter for 2026.

So we can look at economic forecasts, we can look at commentary, we can listen to anecdotes—all of those matter very much. But the people who professionally evaluate companies on a company-by-company level see earnings growth remaining robust into next year. And to add another point to what you were just saying about profit margins, look in the right panel of this exhibit here. We have next-12-month operating margins just climbing higher and higher on a not even monthly, almost weekly basis to a record high now.

So you were making the point about these biggest companies. They're expensive, but maybe they're expensive for a reason, and we're seeing incredible profit margins, particularly by these largest companies, that continue to be expected to rise.

Phil: And you all might have heard us say this before, but we think earnings growth is very important for the market, but margins are as well. In fact, look at where we saw margins tick down in 2022. What happened? The stock market sold off, right? So as margins rise, the market continues to rise.

To that point, we are updating our price target. We do that every few months. Our next 12-month price starts—remember, this is 12 months out, this is not year end—7,200 on the S&P 500 is our base case. After today, intraday trading, that's maybe up 7%.

So I would describe us as constructive, not max-bullish, and certainly not extremely bearish. A couple of things. First of all, in our base case, we're assuming that forward earnings estimates are about right, followed by 9.5% earnings growth, which is not dramatic. We've been doing double-digit earnings growth and slight multiple contraction—in other words PE contracting.

So we are not making huge assumptions here to get to 7,200. Now, one thing I want to make very clear is we do not think that the smooth line upward we've really seen since the spring drawdown is something we're going to see over the next 12 months. In fact, much like we saw in the spring, we would not be too surprised to see some noise in the market. That's okay.

As we remind clients, equities are long-term investments. These are not short term. If these are assets you need in the very near term, they probably don't belong in the stock market.

A couple more things I'll point out. There's more downside to our bear case than upside to our bull case. That is because data is behind these estimates, but also that makes some sense, right?

We are walking a tightrope, and there's a lot of good news priced into this market. So certainly, if the bear case plays out, probably have more downside there than the bull case on the upside. Remember, stock market rallied over 20% in 2023, over 20% in 2024 and it's double digits this year. There's a lot of good news in. Single-digit next 12 months—we would take all day long. We'd be very pleased with that.

Blake: I think it sounds like we're optimistic but maybe cautiously optimistic.

Phil: I think so, yeah. Constructive but certainly cautious and acknowledge that we are seeing some risks in things like the labor market, et cetera.

Let's switch gears to the fixed-income markets. Just very quickly, this is the yield curve as a reminder, Treasury yield curve. So you have Treasury yields on the vertical axis. Horizontal axis is 1-month treasuries all the way up to 30-year.

You can see where we were at the start of the year in the blue line. You can see how much the yield curve has steepened so far this year. The very short in rates, they've moved down, of course, as the Fed has cut. The belly of the curve's kind of 2, 3 years have moved down as more cuts are expected.

But when you look further out, yeah, the 10-year's down about 20 basis points, but look at the 30-year. It's barely moved down at all. This is a reminder, as Greenspan called the great conundrum, the Fed controls the overnight rate, not necessarily long-term rates. Longer-term lending, et cetera, can move differently, of course, than the federal funds rate.

Blake: And on fixed income, we've seen—sort of like in the equity market—the last few months we've seen remarkable stability in the fixed-income market. We haven't seen big swings in yields. There haven't been any big changes in the broader macro narrative around what the Fed might be doing for its rate policy in the last few months. So if things have felt in the second half of the year like they're quite stable, then the reality is it's not just in the equity market but also in the fixed-income market. We've been seeing a similar story.

And despite easier, softer volatility, rates, we think still remain fairly attractive. As you said, they have come down across the curve, not delivering as much yield as they were in recent years, but still for many portfolios, they are a valuable asset to hold—particularly if there's any kind of hesitation around some of the equity market story that we told, then being able to own fixed income in the 4-plus-percent range can be highly attractive.

Phil: It's been a theme in recent years, but we had a whole cycle where fixed income just yielded so little. This was not attractive. Now when you think about a diversified portfolio, there is expected return in fixed income.

Blake: I think all the way back to the very beginning of the year when Brent sat here and gave his investment outlook, and his biggest thing that he was pushing was balance in portfolios. And over the last year, we have seen a big rise in the equity market—maybe bigger than most people expected—but bonds have remained a valuable and important component of any portfolio since he said that then and still today.

Phil: That's right. So on that note, let's pause for questions.

Amy: Hey, before we jump into questions, just a reminder that we do have several publications throughout the month. You can get those sent directly to your inbox by using the QR code on the screen to get signed up, or you can visit FirstCitizens.com/Wealth to get signed up. Also, several of our publications are available in podcast form on Spotify, YouTube and Apple.

Well thank you both for taking a deep dive into markets and the economy. We did have a couple questions come in. Blake, no surprise to the discussion you had around the mentions of tech bubble in the media. Are we in a tech bubble?

Phil: Yeah. So I'll kick that off. I think the real question I've been hearing on the road and certainly is talked a lot about is around artificial intelligence, right? We know that there's just hundreds of billions of dollars of investment going into it. The way I think about these things is one, if everyone's saying something is a bubble, is it a bubble, right? And it really does feel like consensus now.

The idea that there is probably going to be some waste that goes in is, I think that that is a very safe assumption. In fact, any new technology, you do see that. What I think when you say bubble, though, implies it's about to burst. And the issue is the timing of these things is very difficult.

We were just reminded in this most recent earning season that no, money is flowing into corporations. It is driving margin, it is driving earnings growth, it's driving revenue growth. So it's a little bit of one of those two things can be true. There can be some froth.

I think saying that there is froth in artificial intelligence is really not even outside of consensus at this point. But I do think that it's certainly exciting technology. There's going to be a lot of implications for companies outside of just the biggest tech companies.

Timing that is very difficult. I said this during the slideshow, but there was talk of the tech bubble in the 1990s for many years until you actually saw it unwind. And by the way, the winners of AI, just like with the internet in the 1990s, many of those companies we may be unaware of right now. There's a good chance some of them aren't even public companies—a really good chance they're not. So I think we still have a ways to go, but at the same time I would never say that we don't see elevated valuations because we obviously do. But this conversation by the way, we were having this conversation a year ago. It is not a new concept that there is some froth within artificial intelligence.

Blake: I really like the way that you chose to approach the question of the 1990s because there's a ton that we can learn from history, but I think it's important to think about lessons that you can take away. And something that frustrates me sometimes is you see people trying to line up today's experience with the experience of the 1990s or the 1880s.

Phil: And talking about two volts.

Blake: And at what point are we in whatever cycle? And that's frustrating because no cycle is remotely similar. But the way that you just described it of—what lessons can we learn, how can we be wiser and make better decisions—I think is the right way to think about the historical approach.

Phil: In short, we keep an eye on the fundamentals. And when we say fundamentals, we of course mean economic fundamentals, but we also maybe more importantly for this discussion mean earnings fundamentals. And they remain in place at this moment—that can persist.

Amy: Another item in the news was around the Supreme Court decision for tariffs. What are your thoughts around that and how it may impact markets?

Blake: Yeah, huge question here. What has happened is lower courts all the way up through the second-highest courts in the US, the Court of Appeals, have ruled that specifically the emergency tariffs that the White House enacted—so those were tariffs to retaliate against fentanyl trafficking and then also the legal basis for imposing the so-called reciprocal rates—so the vast majority of the hike in tariff rates over the last year, those courts ruled that those were illegal, that the White House did not have the authority to impose them.

So that case has unsurprisingly made its way to the Supreme Court. It has been argued. So the justices a couple weeks ago heard the arguments from both sides, and they also asked questions where a lot of analysts were able to say, "Well, it sounds like they're kind of leaning this way." And that way seems like it is a majority of them were quite skeptical of this emergency use of tariff power.

So the consensus that I saw drawn from that was it's possible that we might see some more uncertainty around the tariffs that are actually going to be in place going forward. One of the biggest questions is if that happens, then what do we do about everything that's happened for the last 7 or 8 months?

And it's possible that the government may be instructed by the court to process some refunds. No one knows how that is going to go about, but what experts are saying is it's very unlikely to be: court issues order, next day Treasury Department sends out a $120 billion to everybody. And even if those refunds did go out, they wouldn't go to households. They'd go to people who paid the tariff, who are the importing businesses.

So the other thing to bear in mind is that there's a broad range of tools that the White House can use to enact their tariff policy. So there's national security tariffs. There's sector-specific tariffs. There's emergency tariffs. And most people think that they can compile different approaches to get the outcome that they want, but the point is it could be messy.

Phil: Yeah. And from a market perspective, it's certainly a driver of uncertainty, but if we land somewhere where, okay, the current tariffs are not in place but they're just going to be put through via other means, I would argue the market—sure, there could be some near-term moves, stock-specific moves—but the market will eventually kind of just look through it. You'd say, "Okay, well it's kind of a steady state where we are."

A lot of the machinations are more questions around accounting departments to me and the Treasury. Markets are going to look through a lot of that noise and say, "Okay, but where are we in 3, 6 months?" If that's a similar place, I would argue that markets are going to look through a lot of that noise.

Amy: Well, thank you both for answering questions. I hope you both have a wonderful Thanksgiving holiday. And to our listeners, I want to thank you for trusting us to bring you this information. We wish you a Happy Thanksgiving, and we'll be back with you next month.

Making Sense

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

Q&A Videos – Monthly conversations covering two to three of the top questions we're hearing from clients.

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

Written Commentary – Often coinciding with market or economic events

Sign up using the QR code to have these updates emailed straight to your inbox.

Or visit FirstCitizens.com/Wealth to subscribe

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

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

The views expressed are those of the author(s) at the time of writing and are subject to change without notice. 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

For more information about FCIS, FCAM, or SVBW and its investment professionals, visit www.FirstCitizens.com/Wealth/Disclosures.