Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Tariffs, Europe & Earnings
Will the new tariffs expected under Trump 2.0 be inflationary, driving up US producers’ input costs and the prices US consumers pay? We’re not worried for several reasons that Eric explains, including the offsetting effects of the strong dollar. … Also: Many countries are facing political turmoil, fiscal instability, and weak economic outlooks these days. Melissa recaps the woes, which reinforce our Stay Home investment strategy. … And: The data are now available showing Q3 revenues, earnings, and margin results for S&P 500 companies collectively and by sector. Joe shares the notable takeaways.
Fed’s Blackout &Foreign Bond Buyers
The Fed has cut the federal funds rate more than enough. Further cutting in December, which the financial markets expect, could send one side of the Fed’s dual mandate in the wrong direction, since inflation remains sticky, while the labor market remains strong. Today, Eric examines the weak rationale for cutting further and the potential consequences doing so could hold. … Also: Why the 10-year Treasury bond yield is slightly lower than we expected.
Roaring 2020s Tour Deep In The Heart Of Texas
As Taylor Swift ends her Eras tour, Dr Ed starts his Roaring 2020s Tour to meet with our accounts. Last week in Texas, they shared their concerns about the “known unknowns,” as the new administration represents a significant policy regime change. On balance, Trump 2.0 should perpetuate our Roaring 2020s scenario. Fortunately, the US economy and financial markets are resilient and tend to outperform globally whomever occupies the White House, thanks to Americans’ indomitable entrepreneurial spirit. … Also: The labor market remains strong, notwithstanding the weakness of some less creditable indicators. … And: Consumers are still doing what they do best.
Energy, P/Es &Influencing Shoppers
Oil and gas industry execs have a wish list for the Trump administration’s energy policy. With one of their own—Liberty Energy CEO Chris Wright—likely to reign over the Department of Energy, their wishes may be more than pipe dreams. … Also: A look at how the valuations of S&P 500 sectors and industries have changed over the course of this year. For many IT industries, lofty P/Es expanded further, while only a handful of industries saw P/Es actually shrink. … And: Is it any surprise that social media influencers influence gift-buying? Maybe not, but the extent of influence one study found is eye-opening.
On France, Financial Stability & LargeCaps Vs SMidCaps
French assets have been sending distress signals for months, and now unstable political dynamics and overly expansionary fiscal policy are coming to a head. … Also: Melissa reviews the Fed’s latest Financial Stability Report, giving YRI’s take on the Fed’s market concerns. … And: Where are stock investors allocating funds to play the Trump 2.0 investment theme? Joe’s data suggest SmallCaps, MidCaps, and cyclical sectors are increasingly in vogue.
Does The Stock Market Have A Valuation Problem?
A key driver of P/E expansion is investors’ perception of how far off the next earnings-crippling recession is. As recent recession fears have dissipated, stock market valuations have risen impressively. Ed walks us through the fluctuations in the S&P 500’s forward P/E during this bull market, highlighting how investors’ beliefs about the economy affect the multiples they’ll pay. … Are valuations overextended now? By historical standards, yes. If they expand much more, we might have to raise our subjective odds of a meltup scenario from the current 25%. … Also: Eric explains why we remain bullish on the outlook for consumer spending.
Live Long & Prosper!
Today, Dr. Ed examines Baby Boomer economics. The Boomers are sitting on sizable nest eggs that continue to expand along with home prices and stock prices. They are starting to spend more of their net worth as they retire. Many Boomers are not empty nesters but have grown children living at home and are providing them with financial support. The population bulge that has had outsized effects on markets in the general economy at every life phase is now the wealthiest and healthiest generation in history—and spending like it. That’s one of the many reasons we remain bullish on the US economy and stock market.
Trump, Bessent & The Bond Vigilantes
The bond market reacted favorably to Trump’s pick for Treasury Secretary, Scott Bessent, suggesting receding concern about the federal budget deficit—as he has a plan to get the deficit under control. That should appease the Bond Vigilantes. We also like Bessent’s “3-3-3” plan, which might boost US economic growth and improve the perilous fiscal outlook. That should set the stage for a continuation of our Roaring 2020s scenario for the rest of the decade. … Also: Eric discusses a potential normalization of the yield curve. We think it may be flatter than in past easing cycles, much as it was during the last half of the 1990s.
Is Trump 2.0 Bullish Or Bearish?
With economic growth robust and the stock market at a record high, we’re living the Roaring 2020s now. The economy’s resilience has been remarkable considering the headwinds it has faced. While the outlook under Trump 2.0 involves lots of moving parts, we don’t see the net effects of his policies jeopardizing the Roaring 2020s’ continuation. In this scenario (with our 55% subjective probability), Trump 2.0 might boost productivity and economic growth, keep inflation subdued, shrink the federal government, slow the growth of government spending, and narrow the federal deficit. Among the biggest of the many challenges ahead: not inciting the Bond Vigilantes. … Dr. Ed’s movie review: “The Rifleman” (+ +).
Health Care, Energy & AI Apps
What can investors expect from Trump’s opinionated nominees to head up the departments of Health and Human Services and Energy? Health care investors haven’t been waiting around to find out what Robert Kennedy, Jr. will do to “make America healthy again.” His controversial ideas, if implemented, would likely disrupt the status quo in several health- and food-related industries. Chris Wright would likely reverse the Biden administration’s ban on LNG exports to certain countries, which would decrease domestic supplies in the oversupplied market. … Also: Jackie looks at the hot trends in AI apps, which developers are rapidly churning out.
Europe Is A Mess
In our framework of three possible scenarios, Ed and Eric assign the lowest subjective odds, 20%, to a catchall bucket of crises that could seriously derail financial markets. They include a 1970s-style geopolitical crisis, a US debt crisis, and now a 1930s-style geopolitical calamity as hostilities escalate in the Ukraine/Russia war. … Also: Melissa reports on the Eurozone’s political and economic challenges. Our low hopes for solutions keep us cautious on investing in stocks across the pond. … And: Analysts’ revenues and earnings estimates for S&P 500 companies typically drop as a year progresses. Joe’s data suggest that 2024 won’t be an exception—but 2025 very well could be.
On Sticky Inflation& Robust Consumers
What if the Fed continues to cut the federal funds rate despite the strength of the economy? What’s that going to do to inflation? Today, Eric explains that a second wave of high inflation isn’t likely given expectations for a productivity growth boom that holds down unit labor cost inflation. But a legitimate worry is that inflation expectations could rise, keeping long-term bond yields elevated and eroding confidence in the Fed. … Also: Consumer spending has been strong, buoyed by growth in real wages as well as several sources of nonlabor income. We expect even stronger consumer spending up ahead.
Trumped
The US Constitution was designed to promote gridlock. But the benefits of gridlock are undermined by lawmakers’ spending freely because the Constitution lacks a balanced budget requirement. … Gridlock is good for investing, but the stock market tends to do well no matter who is in the White House. Trump’s proposals—representing a radical change from Biden’s policies—are likely to materialize because he won a clean sweep. Today, Dr Ed examines their ramifications for financial markets. In the “cons” column: Trump’s trade policies and expansion of the federal budget deficit. In the “pros” column: his corporate tax cuts and deregulation plans. Also, we think the inflationary impacts of Trump’s policies could be offset by low energy prices. His deportations might be similar in scale to previous administrations’.
Consumers, China & COP29
Consumers look ready to deck the halls with abandon this holiday season, Jackie reports. Their incomes are up, gas prices are down, and Home Depot says consumers are spending freely when they can do so without using credit. … Also: China’s long ailing real estate market appears to have perked up in October after the government’s injections of targeted stimulus programs. … And: Funding for green technologies has dropped off precipitously this year, with money gravitating toward all things AI related. But some promising new technologies to help the environment are in the works.
Trump Tariffs 1.0 & 2.0
The new tariffs likely under Trump 2.0 could be means to great ends for the US by increasing the US’s trade negotiating leverage—or they could backfire and cause a trade war that curtails global economic growth, which is not our expectation. Eric explains the opportunities and risks. … Also: Melissa reviews the US’s tariff-related developments under the Trump 1.0 and Biden administrations and discusses Trump’s plans for Mexico. … And: Joe assesses how S&P 500 companies fared last quarter in aggregate and by sector. It was another quarter for the record books, he reports, and Q4 looks poised to continue the momentum.
A New Day In America
We believe Trump 2.0 represents a major regime change that’s bullish for the economy and stocks. We now expect a sooner end to current geopolitical crises and possibly some improvement in the fiscal situation if business-friendly policies boost GDP growth enough to keep pace with mounting federal debt. That along with the tax cuts, deregulation, and better productivity growth we see under Trump increase our confidence in our Roaring 2020s scenario as well as our forecasts for S&P 500 revenues, earnings, and profit margins. That in turn raises our sights for the S&P 500’s valuation and year-end price targets—to 6100 in 2024, 7000 in 2025, 8000 in 2026, and 10,000 by the decade’s close. … Also: Eric reports that productivity growth is still booming.
The Fed: Neutral Or Bust?
Something’s amiss with Fed Chair Powell’s explanation for lowering the federal fund rate a second time in two months despite an economy he admits is performing remarkably well. He tied the rationale for the move to the theoretical “neutral FFR,” implying that monetary policy needs to be less restrictive to reach that point, even though that point is intrinsically unknowable. Also implied was that the related risks are worth taking—including potentially overheating a strong economy, untethering inflation, and inciting a stock market meltup. Eric and Ed disagree that risking all that for an elusive goal makes sense. … Also: A few more questions they would have liked to put to Powell at his Thursday presser. ... Also: Ed reviews “Disclaimer” (+ +).
AI, Cardboard& More AI
Amazon and Meta are benefiting from artificial intelligence in two ways, gaining efficiencies by using AI to optimize their internal operations and gaining revenue by selling AI-optimized products and services. Jackie summarizes what both companies’ CEOs recently said about their manifold AI initiatives. … Also: In an economy where shopping often means shipping, cardboard is strong. International Paper earned much more than analysts anticipated last quarter, and the industry’s revenues and earnings are expected to improve sharply next year. … One downside of AI: It's an energy hog. But solutions to that problem are being developed, as recapped in today’s Disruptive Technologies segment.
Global Bonds, Emerging Markets& S&P 500 Margins
Bond Vigilantes are everywhere these days, selling sovereign bonds and lifting yields in developed countries around the world. Eric leads a tour of global bond markets. … Also: Melissa recaps takeaways from the IMF’s newly published World Economic Outlook, which projects global real GDP growth of a steady 3.2% both this year and next. It might be time to reduce exposure to some EM equity markets, especially Mexico’s. … Also: Joe finds strong profit margin improvement in his analysis of S&P 500 companies’ Q3 earnings reports. The Magnificent-7’s margins hit a new record high.
A Negative Saving Rate?
Expansions, bull markets, and healthy labor markets aren’t created by presidents. All have occurred under the administrations of both parties. Successful businesses create prosperity. Today Dr Ed examines the record-setting economy that has remained resilient while inflation has been tamed. … Also: a look at the Baby Boomers’ increased spending and decreased saving as more of them retire and work down their nest eggs.
Bond Vigilantes Are Fed Up
The bond market seems to be ignoring developments that usually halt rising yields in their track. Investors seem focused instead on the stimulus—both fiscal and monetary—that’s likely coming to an economy that doesn’t need it. The effective result: The bond market is tightening the economy itself. The Bond Vigilantes are back and threatening to take the 10-year Treasury bond yield up to the 5% realm. That ought to give FOMC members pause. … Also: The labor market remains healthy notwithstanding the latest employment report. It offers no good reason for the Fed to ease further at this point. … And Dr Ed pans “Conclave” (- -).
More On Sweep Stakes
The polices of both US presidential contenders would widen an already wide fiscal budget deficit, especially in a sweep scenario, where the party that controls the White House controls the two houses of Congress as well. A Trump presidency and GOP sweep look increasingly likely. Today, Eric compares how a win by each of the candidates might affect the US government debt, deficit, and Treasury bond market. … And Jackie examines potential ramifications of a Harris win versus a Trump win on individual S&P 500 sectors and industries. … Also: How Trump won over the crypto crowd.
Trick Or Treat?
The stock market doesn’t seem to mind today’s “SNAFU” state of affairs, but the bond market has legitimate concerns about a federal debt crisis. We do, too, and are incorporating that prospect into our three-scenario odds. We now see a 30% chance of a crisis—either a US government debt crisis and/or a geopolitical crisis—up from 20%. We’re less bullish on the stock market near term and are lowering our odds of a meltup to 20% from 30%. We remain bearish on bonds. … Also: Melissa summarizes the latest geopolitical frights that don’t seem to be concerning markets. … Joe shares takeaways from the 3Q earnings data of the early reporting S&P 500 companies.
On Economic Data & Theories
Survey-based economic data seem to have become less reliable in recent years, yet some prognosticators build their economic narratives around these soft data that often conflict with the relevant hard data. Today, Eric examines the reliability of five such data sources, which have led many hard-landers astray. … Likewise, ten macroeconomic theories are of dubious help in interpreting what’s going on with the economy these days. Yet they are still followed by many, even when their signals fly in the face of evidence to the contrary.
Valuation In A Resilient Economy
Goldman Sachs’ bold projection that the next 10 years may be a “lost decade” for stocks, with mere 3% annual returns, is unlikely in the extreme, says Dr Ed. It seems to rest on the assumption that valuations in the future will be lower than today’s. Even without expanding valuation multiples, earnings growth would likely boost the S&P 500 price index at a pace that’s at least twice Goldman’s projection, and returns would be more like 11% a year including reinvested dividends. Furthermore, in our Roaring 2020s economic scenario, earnings growth and valuation—and the index’s appreciation potential—would be even greater than that, driven by a technology-led productivity boom. ... Also: Dr Ed reviews “Monsters (+ + +).