Ed Yardeni: Earnings are driving the market, layoffs playing a part

Market Overview - Major indices have erased most of their losses from the previous week, driven by optimism regarding a potential end to the government shutdown and easing concerns about the AI trade [1] - The S&P is projected to end the year at or near 7,000 [1] Earnings Performance - Earnings have shown a significant upward trend, with a "meltup" based on strong fundamentals [3] - Analyst consensus for 2026 earnings has been raised, with Q1 and Q2 of this year outperforming initial low to mid single-digit expectations, achieving low double-digit year-over-year increases [4] - The third quarter earnings reporting season is expected to show a 14% increase for S&P 500 earnings, significantly higher than the initial estimate of 6.5% [5] Productivity and Labor Market - Strong productivity growth is contributing to improved earnings, with real GDP revised up to nearly 4% for Q2 and similar expectations for Q3 [6] - Layoffs, particularly in technology and warehousing, are linked to productivity improvements rather than a decrease in demand for services [7] - The labor market is experiencing structural changes, with a slower growth rate in labor supply, but productivity enhancements from AI and management tools are likely to keep unemployment low [10] Economic Outlook - The economy may experience strong growth rates of 3-4% alongside high employment levels, with productivity gains potentially leading to rising real wages [8][11] - Despite concerns about income and wealth inequality, real wages and household consumption are at record highs, indicating a generally positive macroeconomic environment [12][13]