Key Highlights

● Consumer spending rose strongly in the third quarter despite elevated oil prices.

● Mastercard beat Earnings expectations at $5.31 a share and its shares rose.

● September PCE Inflation heated up, keeping pressure on the Fed.

● The Russell 2000 gained as smaller domestic companies outperformed Big Tech.

American households kept spending through the summer despite $100-plus oil and rising prices, helping power a faster-than-expected third quarter.

The household engine

The US consumer refused to blink. Consumer spending rose strongly in the third quarter, according to the advance GDP estimate released Thursday, October 29, as reported by market data. Combined with booming Business investment, it helped the economy accelerate sharply from the second quarter and beat forecasts.

Consumer spending is the largest single piece of US GDP, so its strength matters more than any other component when gauging the economy's overall health.

Spending through an energy shock

The resilience is notable because households faced real headwinds. Oil has been elevated for weeks, with WTI crude above $100 a barrel since the week of October 23, according to market commentary, and Brent settling at $114.88 on Thursday, according to market data.

September's PCE report showed gasoline prices jumping during the month and energy costs rising sharply, according to media reports, which tied the increase to a war-related oil squeeze. Higher fuel bills typically crowd out other purchases. This time, consumers appear to have absorbed them.

What companies are seeing

The corporate earnings calendar backs up the GDP data. Mastercard (NYSE:MA) reported adjusted earnings of $5.31 a share on Thursday, beating the $5.17 expected, and its shares rose. Card-network results are a real-time window into how much people are spending.

Other consumer-facing names also rallied. Home Depot (NYSE:HD) and Nike (NYSE:NKE) both climbed on Thursday, according to market reports, part of a broad rotation into beaten-down consumer stocks. Chipotle (NYSE:CMG) had jumped in after-hours trading on Wednesday after its results.

Amazon (NASDAQ:AMZN) reported net sales of $201.9 billion after Thursday's close, though its shares fell in extended trading as investors focused on its fourth-quarter guidance and heavy Capital spending.

Why it matters for the Fed

Strong spending supports growth, but it also keeps Demand pressure on prices. September PCE inflation heated up on both a headline and core basis, according to market data.

Fed Chair Kevin Warsh described labor market conditions as "quite positive" on Wednesday, and said Americans are "still dealing with inflation that has been running above the committee's objective," according to media reports. Solid jobs support solid spending, and that combination keeps the Fed on alert.

"Today's data strengthens the case for another rate increase in December," said one economist, according to market commentary.

Main Street stocks beat Big Tech

Thursday's market action reflected confidence in the domestic economy. The Russell 2000, packed with smaller companies that depend on American customers, rose 28.71 points to 2,859.22. Consumer staples were among the best-performing S&P 500 sectors, according to media reports.

The headline indexes struggled because of tech. Alphabet (NASDAQ:GOOGL)'s record drop pulled the Nasdaq Composite down 365.13 points to 26,184.72, and the S&P 500 slipped 23.59 points to 7,720.39, while the consumer discretionary sector also fell, weighed by Amazon's pre-earnings decline.

"Money is rotating within the market rather than leaving it," said one market strategist, according to market commentary.

What to watch

Friday's third-quarter Employment Cost index will show whether paychecks are keeping pace with prices. Rising compensation supports spending, but it can also fuel inflation.

The holiday shopping season is the next big test for consumers, especially if gasoline stays expensive. Amazon's fourth-quarter sales guidance of $240 billion to $247 billion, with a midpoint below the $244.5 billion consensus, gives one early read on how the largest online retailer sees the season. Investors will also watch oil: a sustained move higher in crude could finally start to squeeze household budgets.