GDP Beat at 3.4 Percent While Core Inflation Hit 3.1. By Midday the Market Had Split in Two
Key takeaways
- Third quarter GDP grew at a 3.4 percent annualized rate, accelerating sharply from 2.2 percent in the second quarter, driven by investment and consumer spending, per the BEA advance estimate.
- September core PCE inflation rose 3.1 percent year over year, the highest since May and well above the Fed's 2 percent target, keeping a December rate hike firmly in the conversation.
- Real household finances were softer underneath: inflation adjusted disposable income fell 0.3 percent in September and the saving rate slipped to 3.8 percent.
- The ECB held its deposit rate at 2.50 percent, but Christine Lagarde's surprise announcement that she will resign in February 2027 pushed the euro to its lowest since May.
- The morning market split: the Nasdaq opened down 1.31 percent at 26,202 on Alphabet and software earnings, per Reuters, while the Russell 2000 was up 1.12 percent at mid-morning, per Investrade, as the 10 year yield eased to just under 5 percent.
- Amazon and Intel report after the close; those results are not yet known and will be the next test for AI spending sentiment.
Every number we flagged in this morning's preview has now hit the tape, and the result is one of the stranger midday pictures in weeks. The economy grew faster than many forecasters expected, inflation stayed hotter than the Federal Reserve wants, the European Central Bank held rates while its president announced an early exit, and the stock market moved in two directions at once. The Nasdaq dropped 1.31 percent at Thursday's open after Wednesday night's tech earnings, per Reuters, while small caps rallied more than 1 percent through the morning as Treasury yields eased.
Growth Beat: GDP Came In at 3.4 Percent
The Bureau of Economic Analysis released its advance estimate of third quarter GDP at 8:30 AM, and the headline was strong. The economy grew at a 3.4 percent annualized rate in July, August, and September, up sharply from 2.2 percent in the second quarter, according to the BEA figures reported by Securities.io.
The composition matters as much as the headline. Investment contributed about 3.3 percentage points to growth, per the American Bankers Association's DataBank summary of the BEA release, driven by inventory building in wholesale and manufacturing plus equipment spending dominated by computers, a category that includes the AI buildout. Consumer spending added about 2.5 points, led by healthcare and food services. Government spending added roughly 0.9 points. Trade pulled hard in the other direction: net exports subtracted about 3.3 points in total, per Haver Analytics, one of the largest quarterly trade drags on record, as imports surged at a 19.7 percent annualized pace while exports fell 5.7 percent.
Weekly jobless claims added to the strong growth story, coming in at 194,000, down slightly from 195,000 the week before, per Investrade's mid-morning summary. A labor market that is not cracking plus growth above 3 percent is not the combination that usually precedes rate cuts.
The Inflation Half of the Story Was Less Friendly
Released alongside GDP was the September personal income and outlays report, which contains the Fed's preferred inflation gauge. Core PCE rose 3.1 percent year over year in September, up from 3.0 percent in August and the highest reading since May, according to Seeking Alpha's coverage of the release. The monthly core increase was 0.3 percent, while headline PCE ran 3.6 percent year over year, up from 3.4 percent, per Morningstar. The Fed targets 2 percent.
There is a confusing wrinkle worth untangling. Inside the quarterly GDP report, the PCE price index rose at just a 2.1 percent annualized rate for the third quarter as a whole, way down from 5.0 percent in the second quarter. How can the quarter look cool while September looks hot? The quarterly figure averages three months at an annualized pace, and the monthly data suggest prices re-accelerated late in the quarter. The summer cooled off and September heated back up, with energy a key culprit.
The household details underneath were soft in a way the headline GDP number hides. Personal income rose 0.2 percent in September while spending rose 0.5 percent, which means the gap was covered by saving less: the saving rate slipped to 3.8 percent, and inflation adjusted disposable income actually fell 0.3 percent, per Morningstar. Adjusted for inflation, consumer spending was flat on the month. Households are still spending, but more of each paycheck is going to prices rather than quantity.
Put the two releases together and you get the scenario that kept two Fed officials dissenting in favor of a hike at Wednesday's meeting, which we covered in yesterday's close report. The Fed held its benchmark rate at 3.75 to 4 percent in a 10 to 2 vote, and today's data will do nothing to quiet the December hike conversation.
The ECB Held, and Lagarde Dropped a Surprise
Across the Atlantic, the European Central Bank kept its three key rates unchanged, with the deposit rate at 2.50 percent, as widely expected. Hours earlier, President Christine Lagarde announced she will resign effective February 7, 2027, well before her term was due to end in October 2027, according to The Manila Times. The euro slid to its weakest level against the dollar since May, trading near $1.11.
The ECB also flagged that energy driven inflation risks are rising, which has markets weighing the possibility of a European rate increase in December. For American readers, the practical takeaway is simpler: a weaker euro makes European vacations and imports a bit cheaper, while making life harder for US companies that earn revenue in Europe.
The Morning Tape: Two Markets in One
Here is how the session looked at two checkpoints: the opening levels reported by Reuters, and the mid-morning readings from Investrade's snapshot. These are morning readings, not closing numbers, and individual moves kept shifting through the session.
The split is striking. The Nasdaq opened down 1.31 percent at 26,202, dragged by the earnings reactions that started after Wednesday's close. Alphabet fell hard after its results reignited worries about soaring AI costs, per Reuters. ServiceNow slid past 20 percent after adjusted earnings of $1.00 per share missed the $1.02 estimate, even though revenue topped forecasts, per MoneyCheck. Fortinet dropped about 23 percent, per Investrade: the company beat estimates and raised its full year guidance for total revenue, billings, and adjusted earnings per share, but it cut its full year service revenue forecast to a range of $5.15 billion to $5.17 billion from $5.18 billion to $5.22 billion, per 24/7 Wall St. That roughly $40 million trim to the recurring part of the business overshadowed everything else. Caterpillar slid about 8 percent even after topping estimates, and Xerox sank roughly 39 percent after suspending its dividend and cutting full year guidance, both per Investrade.
Meanwhile the Russell 2000, the index of smaller US companies, was up 1.12 percent at 2,862 at mid-morning, per Investrade. Small caps are more sensitive to borrowing costs, and the 10 year Treasury yield eased about 6 basis points to just under 5 percent after the data. There were real winners too. Crocs jumped about 22 percent after earnings of $3.69 per share beat the $3.31 consensus and the company raised full year guidance, per Investrade and 24/7 Wall St. Teladoc surged about 22 percent on a top and bottom line beat, per Investrade. And ADT climbed toward a 52 week high after agreeing to be acquired by Thrive Holdings for $10.00 per share in cash, a transaction with a $15.3 billion enterprise value. Oil backed off, with WTI crude down $1.60 to around $101, and gold slipped to about $4,037, per Investrade's snapshot.
What This Means for Your Money
A day like this tests the discipline of ordinary investors more than it tests the market. If you owned a Nasdaq heavy fund this morning, you felt the Alphabet and software damage. If you owned a broad total market fund, small cap strength cushioned part of it. That is diversification doing its quiet job, and it is one reason chasing whatever led last year tends to backfire, a pattern we dug into in our guide to the behavior gap.
For savers, the rate picture cuts the other way. If the Fed's next move is a hike rather than a cut, yields on high yield savings accounts, CDs, and Treasury bills are likely to stay elevated longer. The cost side is the mirror image: mortgage rates, auto loans, and credit card APRs price off the same curve, and a 10 year yield near 5 percent keeps borrowing expensive.
What Is Still Ahead Today
The day is not over. Amazon and Intel report earnings after the close, and those results are not known yet, so treat any confident prediction you read this afternoon as a guess. Amazon's report is the next major read on both cloud AI spending and the American consumer heading into the holidays. The Bank of Japan decision follows on Friday. We will cover the close and the after hours reaction in the evening update.
One political footnote, offered neutrally: the strong GDP print arrived days before the midterm elections, and both parties will characterize it their own way. The data says growth accelerated, inflation stayed above target, and real household income slipped in September. All three are true at once.
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Test your Financial IQQuestions people ask
Why did stocks fall if GDP came in stronger than expected?
The weakness was concentrated in technology and driven by earnings, not the economic data. Alphabet fell sharply after its results reignited worries about soaring AI costs. ServiceNow dropped roughly 20 percent after its adjusted EPS of $1.00 missed the $1.02 estimate, even though revenue beat expectations. Fortinet fell hard too, and notably not because of a broad guidance cut: it raised its full year outlook for total revenue, billings, and adjusted EPS, but trimmed its full year service revenue forecast, the recurring part of its business, and investors punished that one line. Strong GDP paired with core inflation above 3 percent also keeps the possibility of a Fed rate hike alive, which limits enthusiasm for expensive growth stocks.
Why did Fortinet drop so much if it beat earnings and raised guidance?
Because the raise and the cut landed in different places. Fortinet lifted its full year targets for total revenue, billings, and adjusted earnings per share, but it lowered its full year service revenue forecast to $5.15 billion to $5.17 billion from $5.18 billion to $5.22 billion, per 24/7 Wall St. Service revenue is the recurring, subscription like part of the business that investors value most highly, so even a roughly $40 million trim there outweighed the headline beat in the market's eyes.
What is the difference between the 2.1 percent PCE number in the GDP report and the 3.6 percent PCE inflation number?
They measure different windows. The 2.1 percent figure is the annualized pace of price increases across the whole third quarter, July through September. The 3.6 percent figure is how much prices rose over the full 12 months ending in September. The monthly data suggest inflation cooled over the summer and then picked back up in September, partly on energy costs.
Does today's data make a December Fed rate hike more likely?
It supports the case the two dissenting Fed officials made on Wednesday. Growth above 3 percent, jobless claims under 200,000, and core inflation at 3.1 percent give the committee little evidence that policy is too tight. Nothing is decided, and more data arrives before the December meeting, but markets are treating a hike as a live possibility rather than a remote one.
Why does Christine Lagarde's resignation matter to US investors?
Leadership uncertainty at a major central bank tends to move currencies, and the euro fell to its weakest level against the dollar since May on the news. A stronger dollar pressures the overseas earnings of large US companies and affects the returns of international stock funds held by American investors, though it also makes European travel and imports cheaper.
Should I change my investments because of one data heavy day?
For most long term investors, no. Days like this one mostly reward people who already had a diversified plan, since small caps gained while big tech fell. Reacting to single sessions is a documented way investors earn less than the funds they own. If anything, use volatile days to check that your overall mix still matches your goals and timeline. This is general education, not personalized advice.
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