Market Note: Earnings and CapEx Keep Expansion Intact

By LakeWater Advisor on November 3, 2025

Earnings Drive Markets. The economy continues to expand at an impressive pace, with the Atlanta Fed’s GDPNow tracker still sitting at 3.9%, nearly double trend growth, and global PMIs north of 50, signaling expansion across regions. The consumer remains the engine of this economy, with companies like Amazon posting standout retail results and manufacturers benefiting from a domestic industrial resurgence.

This resilience is showing up clearly in corporate earnings. So far, 63% of S&P 500 companies have reported results, with earnings growth running at 10.4% year-over-year and revenues up 8.4%, both ahead of expectations. If you exclude META’s 1x charge, earnings would be up over 20% year-over-year.  Roughly 82% of companies are beating earnings estimates, while 67% are topping revenue forecasts.[1] That strength reinforces the long-standing truth that when earnings rise, equities follow.

Shifting Fed Tone, Steady Market Momentum. Just a month ago, Federal Reserve Chair Jerome Powell hinted at the potential for two additional rate cuts before year-end. Fast forward to last week, and his tone shifted, suggesting that a December cut is no longer as likely. For investors, the takeaway is that the economy’s momentum may make additional cuts less urgent. With growth near 4% and inflation at roughly 3%, we simply don’t need that many more rate cuts.

Meanwhile, the volatility that many expected in September and October never truly arrived. Historically, those months tend to be choppy for equities, yet the S&P 500 rose 3.6% in September and 2% in October. That’s a strong setup heading into year-end, especially with the fourth quarter historically strong seasonally and many portfolio managers needing to catch up to their benchmarks.

AI Infrastructure and CapEX. Driving much of this strength is the AI and data center investment cycle, which continues to accelerate at an astonishing pace. The “Magnificent Seven” (MAG 7) are now expected to spend nearly $500 billion this year alone on AI infrastructure, up from early estimates of $400 billion[2], and that investment is rippling through the broader economy. Industrial firms tied to the grid and data center construction plan to spend roughly $90 billion in CapEx this year, while utilities are on track to invest nearly $200 billion to modernize power infrastructure. That spending boom is driving growth across multiple sectors and helping explain why the economy continues to outperform expectations. What we learned this week is not only that this is a strong capex year for spend, but 2026 will likely see $591B in spend and 2027 will see $700B in spend – just from these Mag 7 companies.  We remain convicted that we are in early cycles for the AI theme and spend.

Layoffs Reflect Post-Pandemic Norms. A wave of corporate layoffs has surfaced in recent weeks, but much of it reflects normalization rather than broad economic weakness. Some reductions are tied to efficiency gains from artificial intelligence, while others stem from companies unwinding the overhiring that occurred during the pandemic. UPS announced plans to reduce its workforce by 48,000 employees, 14,000 in management and 34,000 in operations, while Amazon revealed another 14,000 job cuts as it continues to streamline operations.[3] Taken together, these moves appear more cyclical and strategic than symptomatic of a weakening labor market, as companies recalibrate staffing levels to align with current demand and long-term productivity goals. Goldman Sachs’ state-by-state calculation of weekly jobless claims suggests the claims data remains under control. 

Looking Ahead. Another 25% of the S&P 500 will report earnings this week, including notable names like Uber, Rockwell Automation, KKR, and McDonald’s. With limited economic data available due to ongoing government closures, corporate results will once again take center stage. The economy is growing, earnings are rising, and AI investments are surging.

Fixed Income. U.S. Treasury yields advanced across the curve last week following the Federal Reserve’s policy decision. Although the Fed implemented a widely anticipated reduction in its benchmark rate, Chair Powell emphasized that an additional cut in the coming month is “not a foregone conclusion.” The hawkish tone prompted market participants to temper expectations for further easing, with the implied probability of a December rate cut declining from 92% to 66%. By week’s end, yields on the 2-, 10-, and 30-year yields had increased by 7, 4, and 3 basis points, respectively.[4]

Corporate credit spread performance diverged across ratings last week. Investment-grade spreads widened 5 basis points to +115, while high-yield spreads narrowed 2 basis points to +337. Municipal bond market performance followed Treasuries last week, as yields increased between 2-4 basis points across the curve.

Return for Selected Indices[5]

[1] Morningstar: As of October 30 2025

[2] Bloomberg: As of October 31 2025

[3] Bloomberg: As of October 2025

[4] Bloomberg: As of October 2025

[5] Source: Bloomberg. As of November 2, 2025.