Faster US economic growth spoils Goldilocks bet on Fed rate cuts

(Originally published Sept. 26 in “What in the World“) The vampire squid has joined those warning that the market is in for a wild ride.

Goldman Sach’s equity analyst John Marshall published a note to clients earlier this week warning that stocks could be in for a volatile October as investors react to third-quarter earnings reports. Marshall pointed out that October is traditionally more volatile anyway for markets. The steady rally over the past few months has set investors up for disappointment.

That disappointment may already be showing in the market’s lackluster performance this week: the S&P500 has retreated slightly more than 1%. The latest investor concern is that the U.S. economy may be doing much better than feared. The U.S. Bureau of Economic Analysis on Thursday revised upward its estimate for economic growth in the second quarter, to an annualized rate of 3.8%, from its previous estimate of 3.3%. Why? Though the pace of growth appears to be slowing, consumer spending held up against Trump’s tariffs and a weakening job market. And companies spent more on equipment and “intellectual property products,” like software.

Good news for the economy is bad news for investors banking on the Federal Reserve to cut interest rates further. While investors had been at least 80% certain on two more 0.25 percentage point rate cuts this year, their level of confidence on that bet has dropped to roughly 60%.

New tariffs from Trump aren’t helping either. Fresh from his tirade against escalators and teleprompters at the United Nations, His Indignance announced a new 100% tariff on imports of branded pharmaceuticals and a 25% tariff on imported heavy trucks.