Markets Brief: Long-Awaited Inflation Data Points To Rate Cut This Week

CPI Data Signals Potential Rate Cut

As the Federal Government shutdown enters its fifth week, the release of the latest CPI measure of inflation was a rare break in the drought of economic data. Despite remaining above target, annual core CPI- which excludes volatile food and energy prices- was lower than expected at 3%, falling from 3.1% in August. This reinforced expectations of a further 0.25% interest rate cut when the Federal Reserve Open Market Committee meets this week.

The positive response of investors to above-target inflation is a reminder that asset prices reflect our collective expectations and consequently, it is the relationship between these expectations and reality, coupled with the prevailing sentiment of investors, that drives asset prices in the short term. In contrast, longer-term returns, that are typically more relevant to investors, are driven by the fundamental characteristics of an asset, which exert a gravity-like pull on prices. Like a baseball flying off a bat, it can appear to defy gravity for a time, but not permanently.

Earnings Season Is Underway

The impact of expectations can also be seen in the latest set of company results. With about one quarter of companies reporting so far, the expected profit growth over the third quarter of 2025 has risen to 9.2%, significantly ahead of expectations at the end of September and an increase of 0.7% from the previous week, according to FactSet. Given this slew of good news, it is not surprising that the Morningstar US Market Index rose 2% over the week, led by the gravity-defying technology sector, up 2.8%. Investors appeared buoyed by results from Intel INTC with the next big test of sentiment coming this week with results from Apple AAPL and results from Microsoft MSFT. At the other end of the scale were consumer defensive stocks, which were down 0.6%, despite gains from bellwether stocks Coca-Cola KO and Procter & Gamble PG, both of which reported last week.

Tesla Stock Warning

Tesla TSLA stock fell sharply following its results, before recovering to end the week down 1.3%. Despite raising his Fair Value Estimate by 20%, Morningstar analyst Seth Goldstein continues to believe Tesla is significantly overvalued, as investors are ascribing too much value to unproven future growth opportunities. The optimism that characterizes Tesla investors highlights the continued bifurcation of the market. This is further illustrated by this article from George Metrou, manager of Morningstar Wealth’s Dividend portfolio, contrasting the value of a proposed datacenter-focused REIT with an established REIT that invests in medical centers. It is unclear how long such anomalies can defy the gravity of company fundamentals, but we can be sure it will not be permanent.

The Dollar Retains Its Dominance

Further afield, the US Dollar rose 0.4% last week and is now 2.4% higher than its recent trough in mid-September, dragging down the returns of overseas assets for US investors. Despite this currency headwind, both the Morningstar Developed Markets ex-US Index ticked up 1.3%, while emerging markets rose 1.9%. Asian equities continue to draw the attention of investors seeking better value opportunities. To find out more, check out Morningstar’s latest Asia Equity Market Outlook.

Credit Spreads Still Close to Historic Lows

Testament to the short attention span of investors, credit spreads, the additional yield investors receive for accepting default risk, remained stable near historically low levels, despite the recent scare over weakening lending practices in private credit. While it is impossible to judge with the number or size of the ‘cockroaches’ yet to emerge in credit markets - to use Jamie Dimon’s phrase - it seems clear that investors remain willing to accept unusually low compensation for this risk.

To obtain a broader overview of the current opportunities for investors, check out Morningstar’s latest asset class report here.

All Eyes on Forthcoming Data

Alongside the FOMC meeting, additional data, including the release of the Fed’s preferred measure of inflation, is due for release this week, although it will remain under wraps if the government shutdown continues. While the outcome of the FOMC meeting is likely to grab most of the headlines, the ongoing earnings season will hold more interest for investors.

The Magnificent Seven Report Earnings

Alongside Apple and Microsoft, fellow Magnificent Seven stocks Alphabet GOOGL, Amazon AMZN, and Meta META are due to report. You can find our analysis of these results on our dedicated results page here and keep track of all forthcoming economic an company announcements on this calendar.