Keywords: flash PMI, S&P Global composite PMI, GDPNow, US economic growth, Fed rate hike, S&P 500 earnings

Key Highlights

  • The S&P Global flash US Composite PMI jumped to 58.4 in September from 56.0 in August, the strongest private-sector expansion since July 2021 and the fourth straight month of accelerating growth.
  • Manufacturing climbed to 56.7 from 53.1 and services to 58.7 from 56.5, while input costs rose the most since October 2022 on fuel, transport and wage pressures.
  • The Atlanta Fed GDPNow model estimated third-quarter real GDP growth at 5.0 percent as of September 25.
  • The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is the broad instrument for the growth-versus-rates debate, with the S&P 500 at 7,683.69 on September 28, nearly flat for the month.

A Broad, Accelerating Expansion

The September flash survey marks a clear break from tepid growth earlier in the year. The composite rose 2.4 points to 58.4, with Manufacturing up 3.6 points to 56.7 and services, the larger share of activity, at 58.7. Firms added staff at the fastest pace since June 2022, and order backlogs built at the sharpest rate since May 2022, a signal that Demand is running ahead of capacity. Official estimates point the same way. The Atlanta Fed GDPNow model put third-quarter growth at 5.0 percent, against a 1.5 percent annualized second-quarter pace in the second estimate, which the Bureau of Economic Analysis revises on September 30. Christopher Rupkey of FWDBONDS has said the economy seems to be firing on all cylinders, helped by AI Capital spending.

The Price Side of the Survey

For the Fed, the key line may be input costs, which rose at the fastest rate since October 2022 on fuel, transport and wage pressures. That matches the energy shock visible elsewhere: Brent Crude rose to USD 108.59 a barrel on September 28, and August gasoline prices were up 27.4 percent from a year earlier. When backlogs build and costs rise together, firms have more room to pass increases on to customers, the mechanism officials have warned about. The Fed raised rates to 3.75 percent to 4.00 percent on September 16, lifted its 2026 growth forecast to 2.3 percent and pushed the expected return to 2 percent Inflation out to 2029. Governor Lisa Cook has flagged inflation pressure from the AI buildout. These readings help explain why CME FedWatch put October hike odds at 72.5 percent as of September 28.

Good News for Earnings, Bad News for Multiples

Strong activity cuts both ways for equities. FactSet data show analysts expect third-quarter S&P 500 Earnings growth of 29.1 percent on Revenue growth of 12.1 percent. Yet the PMI also helped push the 10-year Treasury Yield to about 5.21 percent on September 28, its highest since mid-2007, with the forward 12-month P/E at 19.2. For the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the tension showed in price: the index reached 7,743.41 on September 25 before falling 0.77 percent to 7,683.69 on September 28 as crude and yields rose. Leadership has narrowed, with only 27 percent of S&P 500 members above their 50-day moving averages as of September 25, and the Russell 2000 sits about 7.7 percent below its August record. The Cboe Volatility Index held near 16.1, close to its one-year low.

Where Things Stand

It is hot enough to keep the Fed tightening, though not necessarily too hot for equities. A 58.4 composite, the fastest hiring since June 2022 and the quickest input cost increases since October 2022 reinforce the Fed's bias, and CME FedWatch prices a 72.5 percent chance of an October 28 hike. For the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the offset is 29.1 percent expected third-quarter earnings growth, set against a 10-year yield above 5.2 percent. August PCE on September 30, payrolls on October 2 and big bank earnings from October 13 are the next tests.