Viavi Solutions is a provider of both hardware-based and software-based network services. Viavi's core business is network and service enablement, which includes test & measurement, network visibility, service assurance, and related capabilities. Viavi also contains Optical Specialty Products, which after several asset dispositions focuses mainly on currency-authentication solutions. In August 2015, Viavi began trading under the VIAV ticker after spinning off JDSU's former CCOP business into Lumentum Inc.

October Surprise: Our Monthly Survey of the Economy, Interest Rates, and Stocks Presidential elections are sometimes impacted and even upended by a so-called October Surprise. These include a fraudulent letter purporting that Republican Candidate Garfield supported Chinese emigration - a false allegation that nearly cost him the 1880 election; the death of President Taft's Vice President just days before he would lose the 1912 election to Woodrow Wilson; and the ouster of Nikita Khrushchev in mid-October 1964, which helped LBJ hold the presidency he had inherited from John Kennedy. More recently, Iran is believed to have held off releasing U.S. hostages until after the 1980 election, which benefited challenger Ronald Reagan. Late in October 2016, the FBI announced that its investigation into Hillary Clinton's emails was ongoing; the announcement came just days before President Trump's stunning victory. The year 2024 passed without any significant event that would qualify as an October surprise in politics. Investors on the other hand saw seemingly sure-thing stock market gains for October evaporate in the final two days of trading on AI profit-taking. During earnings season, investors experienced sticker shock when giants Meta, Alphabet, and Microsoft revealed their huge capital spending plans for AI. Late-October selling was also a reaction to spiking interest rates, which could impact timing of any recovery in the housing economy. The Economy, Interest Rates, and Earnings U.S. Gross Domestic Product (GDP) sustained mid-year 2024 strength into the third quarter. Highlights of the quarter included ongoing growth in consumer spending, particularly for durable goods, and a high level of spending by the federal government. A review of third-quarter data indicates a normally growing economy heading into year-end, and Argus has upwardly revised our expectations for full-year 2024 GDP growth. The advance report of third-quarter GDP showed growth of 2.8%. GDP growth in the advance report came in two ticks lighter than consensus expectations near 3.0%. But note that at mid-year, consensus expectations for 3Q24 GDP growth were in the 2% or lower range. Growth in real 3Q24 GDP primarily reflected increases in personal consumption expenditures, exports, and federal government spending. These gains were partly offset by an increase in imports, which are a subtraction in the calculation of GDP. The decrease from 3.0% growth in 2Q24 GDP reflected a downturn in private inventory investment and residential fixed investment. Category growth leaders in 3Q24 GDP spanned increases in both goods and services. Within goods, leading contributors included other nondurable goods such as prescription drugs and motor vehicles & parts. Leading contributors in the services category included healthcare outpatient services as well as food services and accommodations. Personal consumption expenditures for 3Q24 increased 3.7%, up from 3.0% for 2Q24 and 2.5% for all of 2023. Spending on goods increased 6.0% in 3Q24, double the 2Q24 rate. Durable goods spending rose a sharp 8.1% in 3Q24, extending second-quarter strength that reversed a decline in the first quarter. Durable goods spending was up 3.9 % for all of 2023. Nondurable goods spending rose 4.9% for 3Q24. The decline in annual inflation growth has been concentrated mainly in goods, while services inflation remains somewhat elevated. Consumers now appear more willing to buy goods at stable or in some cases lower prices. Consumer spending on services grew 2.6% in 3Q24, little changed from 2Q24 levels. Consumer spending on services grew 2.9% in 2023. Some of the growth in consumer services spending has been driven by rent equivalent and insurance, two costs consumers cannot control, and many cannot avoid. After a weak first quarter for PCE, the bounce-back in the second and third quarters suggests that consumers are adapting to structurally higher prices. We expect PCE within the GDP accounts to continue to send conflicting signals, with goods spending more volatile than services. Nonresidential fixed investment, the proxy for corporate capital spending, rose at a 3.3% annual rate in 3Q24, down from annual rates of 3.9% in 2Q24 and 4.5% in 1Q24; this category grew at a 6.0% rate in 2023. PCE and nonresidential fixed investment represent about four-fifths of GDP in any quarter. In 3Q24, consumer spending added 2.46 percentage point to GDP, while nonresidential fixed investment added 0.46 percentage point. Residential fixed investment remained negative in 3Q24, pulling back by 5.1% after declining 2.4% in 2Q24. Even with the Fed beginning to cut rates, the housing sector is a long way from healthy. The export-import balance favored imports in 3Q24, as it did in the first half, but exports were the strongest since 2Q22. Exports grew 8.9% in 3Q24, while imports were up 11.2%. Given the higher dollar value of imports, the net exports-imports balance subtracted 56 basis points (bps) from overall 3Q24 GDP growth. We expect this category to remain volatile quarter over quarter. Another volatile category, the change in private inventories, subtracted 17 bps from 3Q24 GDP after adding 105 bps to 2Q24 GDP. Supply-chain distortions have (mostly) receded. Sharply higher tariffs under a new administration, however, could be another potentially disruptive factor. Overall government spending was up 5.0% and added just over one-half percentage point to 3Q24 GDP growth. Federal spending was up 9.7%, led by a nearly 15% increase in defense spending, while state and local government spending grew 2.3%. The price index for gross domestic purchases increased 1.8% in 3Q24, compared with revised increases of 2.4% in 2Q24 and 3.1% in 1Q24. And the Personal Consumption Expenditures (PCE) price index advanced 1.5%, down from 2.5% in 2Q24. The core PCE index of 2.8% was unchanged from 2Q24. Solid GDP growth with lower price increases gives the Fed room to cut rates going forward. Outside the generally strong GDP accounts, the economic picture is mixed. U.S. economic indicators generally suggest deceleration, although growth continues at a subdued level. The consumer economy continues to send mixed signals. Jobs and wages are still growing - but at a meaningfully slower pace. The U.S. economy generated just 12,000 new jobs in September, but the report was considered an outlier due to the impact of the Boeing strike and the major hurricanes and storms in the Southeast. While growth in new jobs continues to slow, multiple indicators of the employment economy - including the unemployment rate, wage growth, and the average work week - improved in September. The unemployment rate ticked down to 4.1% in September from 4.2% in August 2024. Unemployment hit a multi-year high of 4.3% in July. Average hourly earnings increased 13 cents month to month for August and were 4.0% higher year over year, vs. 3.8% for August. Annual wage growth continues to run above inflation, but the premium has narrowed. The consumer seems slightly more optimistic, or perhaps reconciled to higher prices. Retail sales provided some good news for the market, rising 0.4% in September from a 0.1% gain in August. Sales were ahead of consensus expectations. Excluding vehicles, September retail sales were up 0.5%; and excluding vehicles and gas, sales were up 0.7%. Vehicle sales are being hurt by sticker shock and high financing costs, while the decline in gas sales mainly reflects a consumer-friendly decline in gasoline costs. Struggles at Boeing have pressured exports, given the importance of aerospace to goods exports. The machinists' strike (potentially now resolved) was just the latest headache for the company, which has faced headwind in both its commercial and defense & space units. Industrial production decreased 0.3% in September, which was worse than the 0.1% consensus call. The decline was mainly due to the strike at Boeing along with the two major hurricanes that hit the Southeast. Aerospace & miscellaneous transportation decreased 8.3%, likely due to the Boeing strike. Capacity utilization was 77.5% in September, about 2.2 points below the long-run average. The NFIB Small Business Optimism Index came in at 91.5, marking the thirty-third consecutive month below the 50-year average of 98. This index has been battered by inflation, and before that, by difficulty in finding qualified workers. The Uncertainty Index rose 11 points to 103, which was the highest reading recorded in this series. In the months preceding the Fed's first rate cut of the cycle in September, something like optimism returned to the long-depressed housing industry. But rates as noted have spiked higher after first coming down around the time of the September rate cut. The effect of lower rates on housing should be positive. Given the huge number of sub-4% mortgages or homes with no mortgage, however, Argus is not looking for a housing surge like that seen in the pandemic period. September existing home sales fell to a 14-year low, coming in at a seasonally adjusted annual rate (SAAR) of 3.84 million units. Supply has improved, but the most desirable homes currently - entry-level for those starting families - remain in short supply nationwide. Home prices in aggregate are simply too high for many would-be buyers. Sales in September mainly were for deals concluded in the months preceding the Fed's rate cut. But few expect the existing homes market to recover rapidly. New home sales, by contrast, ticked higher to a 738,000 SAAR for September from 709,000 for August. New home sales, which account for about one-sixth of all home sales, were at their highest level in nearly a year and a half. Builders finally may be realizing that the scarcity of affordable starter homes creates an opportunity to stimulate homebuilding. Consumer sentiment hit a six-month high in October, coming at 70.5 from 70.1 in September in response to prospects for interest-rate relief. The University of Michigan Consumer Sentiment Index has been volatile and could easily move down again. But the combination of higher retail sales, new home sales, and sentiment sent a positive message to a market worried about Boeing and the industrial economy. Note that historical GDP data were recently revised for all quarters and years from the first quarter of 2019 through the first quarter of 2024. In mid-October, Chief Economist Chris Graja, CFA, raised the Argus third-quarter 2024 GDP forecast to 3.0%, from a prior 1.6%, and raised the Argus 4Q24 GDP forecast to 2.3%, from a prior 1.7%. Given net first-half strength and the higher second-half outlook, Argus now looks for GDP growth of 2.5% for all of 2024, raised from a prior 1.9%. Argus retained its forecast for 2.0% GDP growth in 2025. We also continue to believe the U.S. economy can avoid recession in 2024 and 2025, as it did in 2023 and 2022. The U.S. central bank started its rate-hiking campaign in March 2022. Sixteen months and more than five percentage points later, the Fed halted in July 2023; and it held rates steady for eight straight meetings. Finally, at its mid-September 2024 Federal Open Market Committee (FOMC) meeting, the Fed cut interest rates by 50 basis points. The last time the Fed cut rates was more than four years ago in 2020, amid the turbulence and extraordinary circumstances of global COVID-19 pandemic. Normally, the Fed cuts rates when growth is slowing, and the economy is at risk of slipping into recession. This time, the Fed began its rate-cutting cycle at a time when GDP is growing, companies are reporting solid earnings growth, the workforce is close to full employment, and annual wage growth is higher than annual inflation growth. The September post-meeting commentary from the Fed acknowledged that job gains have slowed, even amid overall healthy economic conditions. The FOMC believes that risks to achieving its employment and inflation objectives are 'roughly in balance.' Given these factors, the committee decided to lower the target range for the fed funds rate by half a percentage point, to 4.75%-5.0%. Heading into the meeting, the futures market appeared to be anticipating a 50-bps cut. The consensus of economists and market strategists, on the other hand, indicated expectations for a 25-bps cut. The FOMC under Chair Jerome Powell has proven unafraid of aggressive action when such action are needed. The Powell-led Fed in summer through fall 2022 hiked interest rates in 75 basis point increments four straight times. The FOMC was uniform in its belief that 50 bps was the appropriate cut, with 11 of the 12 FOMC members voting in favor of the move. The Fed's preferred inflation gauge, the core PCE price index, rose 0.3% in September and was up 2.7% year over year. The monthly increase matched that in August, which was the lowest since early 2021. The core PCE data confirmed inflation inputs from the September CPI report issued in mid-October. All-items CPI rose 0.2% month over month for September and 2.4% year over year. While both missed consensus by one tick, the annual change was the lowest since March 2021, before the onslaught of inflation. The September Producer Price Index (PPI) cheered the market with no change on a month-over-month basis. The year-over-year change of 1.8% was a tick higher than expected but 20 basis points below the Fed's 2% target. Core PPI (less food and energy) was right at the Fed's 2% target. Bond yields hit multi-month lows following the Fed's September rate cuts, but started ticking higher soon after on solid economic data. The multi-year inversion in the yield curve appears to be over. Both middle-maturity and long-maturity yields, however, have moved up off their mid-September lows. The 10-year Treasury yield was 4.37% as of the end of October, compared with 3.75% as of the end of September; the cycle peak for the 10-year yield was the 4.9% level in October 2023. The two-year Treasury yield was 4.21% as of the end of October, vs. 3.55% as of the end of September; the peak level was 5.2% as of October 2023. Notwithstanding current noise in the market, Argus expects short-term yields to move lower from current levels. Long yields over time are expected to widen their relative premium to short yields. We likely have seen the end to twos-10s inversion in this cycle, but two- and 10-year yields could remain in proximity in the near term. Argus Fixed Income Strategist Kevin Heal is modeling two additional quarter-point rate cuts in 2024, one each at the November and December FOMC meetings. Note that the November FOMC meeting occurs post-election. These cuts, if enacted, would bring the Fed's central tendency to the 4.25%-4.50% level by year-end. On a preliminary basis, Kevin anticipates two or three additional quarter-point cuts in 2025, bringing the central tendency as low as 3.50%-3.75% by December 2025. The Fed is expected tailor its policy, according to Kevin, based on the state of the economy in 2025. First-quarter 2024 earnings outpaced expectations but were below the double-digit growth that prevailed in the pandemic and immediate post-pandemic era. Second-quarter 2024 earnings from continuing operations rose in high-single-digit to low-double-digit percentages, on a year-over-year basis. Third-quarter growth is coming in lower than in 1Q or 2Q against a tougher year-over-year comparison. With over half of S&P 500 component companies having reported results, third-quarter 2024 earnings from continuing operations are up a bit more than 5% compared with 3Q23 EPS, this according to FactSet, and up 8% according to Refinitiv. According to Bloomberg, 2Q24 earnings are up 9% on a share-weighted basis and 12% on a market-cap-weighted basis. This premium of market-cap-weighted to share-weighted EPS growth is reflective of the earnings outperformance of large-capitalization companies compared with small- and mid-caps. The best earnings growth in 3Q24 is coming from Communication Services, Technology, Healthcare, and Consumer Discretionary; all have posted earnings growth higher than S&P 500 continuing operations EPS growth. The sectors posting negative earnings in 3Q24 are Energy, Industrials, and Materials. We believe the negative trend in these three sectors could reverse in 4Q24. About 75% of companies have reported positive EPS surprises in 3Q24, below the five-year average of 77% and above the 10-year average of 74%. For these companies, the median beat against consensus estimates is 4.8%, below the 10-year average of 6.8%. Although third-quarter earnings are coming in a bit below Argus expectations, first- and second-quarter earnings both topped our estimates. For 2Q24, Argus continues to model high-single-digit continuing-operations EPS growth for S&P 500 component companies. We no longer see a higher likelihood that our forecast misses on the upside than on the downside, however. In other words, once all the component companies are tallied, we are more likely to see high-single-digit EPS growth for 2024 than low-double-digit EPS growth. Our forecasts for S&P 500 earnings from continuing operations are $247 for 2024 and $265 for 2025. According to Argus President John Eade, our stock-bond barometer is near equilibrium. Given declining inflation growth and interest rates along with our forecast for high-single-digit EPS growth for 2024 and 2025, stocks appear favorable at current levels. A key risk to valuations would be earnings growth failing to meet the market's targets and/or inflation or interest rates ticking higher. Either of those factors would result in elevated valuations but represent just modest risks currently. Domestic and Global Markets At the end of September 2024, many indices were at or near all-time highs. And in mid-October, indices including the S&P 500 and Nasdaq Composite made fresh all-time highs. But October finished with a crash, particularly in the last two trading days. At the 10-month 2024 mark, the S&P 500 had delivered total return (with dividend) of 21.5%, down about a point from 3Q24-end. The Nasdaq was up 22.2% on a total-return basis, having regained slight leadership over the broad market index. In almost any year in which the overall stock market is up in solid double digits at the three-quarters mark, the Nasdaq typically has built a significant performance lead over the broad market S&P 500. We believe the similarity in S&P 500 and Nasdaq performance in 2024 to date reflects heavy investor concentration in the so-called Magnificent 7 stocks, which are included in both indices and are by far the largest stocks on the market. Wilshire Large Cap Growth expanded its premium to Wilshire Large Cap Value to about 14 percentage points at October-end, from 12 percentage points at the end of 3Q24. With investors taking profits in the giants, small caps have narrowed their underperformance. The Russell 2000 was up about 10% at the end of October, after being up 2% at mid-year. The Dow Jones Industrial Average is also closing the gap and is up around 13% for the year. The Barclays Bloomberg U.S. Bond Index, which was up 4.5% year to date at the end of 3Q24, has fallen as market interest rates have risen. The index was up 1.1% at October, still an improvement after being down 2% at mid-year. Even with the broad market at or near all-time highs, we believe stocks can continue to rise from here, given positive fundamentals in GDP and earnings. There will also be a strong technical pull into year-end 2024 as hold-out bears likely capitulate and the market positions for a prolonged rate-cutting cycle. Investors' nearly two-year fascination with AI stocks has not gone away, but it has moderated. And AI stock winnings may now be a vital source of funds for investing in other areas perceived as timely in the currently unfolding interest-rate environment. During the third quarter, the two best-performing sectors were the high-income sectors including Utilities and Real Estate. Other leading sectors included cyclical (Industrial and Materials) and Defensive (Consumer Staples and Healthcare). As interest rates have spiked back up, those sectors have had a tough October into early November. Sectors that declined between 3% and 5% in October include Healthcare, Utilities, Consumer Staples, Materials, and Real Estate. The surprise winner in 3Q24 was Consumer Discretionary -- and it carried that strength into October. Consumer Discretionary was among the bottom two sectors in the first half. Given prospects for lower rates helping the housing and automotive segments, Consumer Discretionary is pushing toward middle of the pack among 11 sectors in 2024. During the third quarter, investors shifted winnings from growth stocks into cyclical and defensive stocks, along with stocks in high-income sectors perceived as benefiting from lower interest rates. The traditional growth sectors had big year-to-date leads heading into 3Q24 and those leads continue to hold. But the market is showing refreshing breadth with the shift toward formerly-shunned parts of the market. This shift first got underway in July, intensified in August, and continued in September. In October, most sectors had little to no change in weighting relative to where they stood at the end of the third quarter of 2024. But two sectors did have a meaningful movement. The Healthcare sector went from an 11.6% weighting at 3Q24-end to 11.2% as of October-end. Much of that weight shifted into the Financial sector, which beefed up to a 13.4% weighting at October-end from 12.9% at the end of the third quarter. Investors are betting that the decline in rates will benefit banks' fee-based business, lending, and mortgage activity. Early in September, we raised the Utilities sector to recommended Over-Weight from recommended Market-Weight. Utility stocks have been positive throughout 2024 in anticipation of lower interest rates, and sector really took off in the third quarter as that possibility became a likelihood. In addition to the sector's attraction as a source of income now that bond yields are coming down, we expect Utilities to benefit from the providing the power needs of the fast-growing AI data center market. Our recommended sector weightings are as follows: *Over-Weight: Communication Services, Financial, Healthcare, Information Technology, and Utilities. *Market-Weight: Consumer Discretionary, Energy, Industrials, and Real Estate. *Under-Weight: Consumer Staples, and Materials Like the U.S. market, global stocks did better in 2023 than they did in 2022; and most have carried that momentum across 2024. Compared to 2023, we continue to some changes in international stock-market leadership in 2024. By far the biggest change in the past few months has been the surge in Chinese stocks on that country's announced stimulus program, the largest since the pandemic era. On average, our composite of global bourses is up about 10.7% year-to-date at the end of October 2024, after being up 12.4% at the end of 3Q24 and 7% at the end of first half of the year. Nearly every national market stepped back in October but not to the level we would label a correction. In terms of our themes, the China rally has upended the leader board. Asian markets are up 16.6%, as India and Japan are joined by China. Mature economies are next in 2024 with a 14% gain; this theme won 2023 with a 22% gain. BRICs-minus-Russia is up 8% in 2024 after lagging in 2023. Americas markets (including U.S., Brazil, Mexico, and Canada) are up just 7% in 2024 after rising 20% in 2023. Resources economies (up less than 2%) have not lived up to last year's 18% gain. Conclusion Bond yields hit multi-month lows following the Fed's September rate cut. The strong September nonfarm payrolls report sent yields spiking higher across the maturity spectrum, and the strike- and storm-impacted October tally has had little effect on the yield curve. Questions about the pace of Fed rate cuts, along with an earnings season that is shaping up to be weaker than second-quarter EPS season, have contributed to the broader uncertainty that has surrounded a too-close-to-call presidential election. The stock market rallied in November and December of 2016 and 2020 post-election, and investors are hoping for more of the same to cap a solid 2024 for stocks.

Small- and mid-cap stocks (SMID), despite bursts of outperformance, have underperformed large-caps year to date - as they have over the past five years. But they may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps. SMID stocks can be risky, but despite those risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 20% of the U.S. stock market's capitalization is comprised of SMID stocks.

Viavi Solutions is a provider of both hardware-based and software-based network services. Viavi's core business is network and service enablement, which includes test & measurement, network visibility, service assurance, and related capabilities. Viavi also contains Optical Specialty Products, which after several asset dispositions focuses mainly on currency-authentication solutions. In August 2015, Viavi began trading under the VIAV ticker after spinning off JDSU's former CCOP business into Lumentum Inc.