Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Industrials, Housing & Smart Robots
The S&P 500 Industrials sector has performed well this year to date, even though it’s been dragged down by the Aerospace & Defense industry, home to the deeply underperforming Boeing. Today, Jackie takes a look at what Boeing management and two other industry stalwarts had to say when reporting September-quarter earnings. … Also: The S&P 500 Homebuilding stock price index is down from its recent high, reflecting the climb in interest and mortgage rates and weak home prices in many large metro areas. … And our Disruptive Technologies segment focuses on the next evolution of humanoid robots, which are learning to expect to the unexpected.
Still Staying Home
We continue to recommend a Stay Home versus Go Global stock market strategy. While US stocks tend to command higher valuation multiples, that’s for good reason. Using forward profit margin and revenues-per-share data from MSCI indexes around the world, Eric and Melissa demonstrate that American companies generally sport better fundamentals than their counterparts in both developed and emerging economies around the world. … Also: Joe reports that while the S&P 500’s Q3 earnings per share took an unexpected dip last week, it was for company- and industry-specific reasons and doesn’t bode poorly for the market broadly.
On China & The Dollar
Chinese stocks surged in response to the government’s stimulus plan in September. The government has done little to please investors since. China would be better off stimulating consumer spending via “helicopter money,” Eric explains, rather than trying to boost asset prices and increasing lending. … Also: The US dollar has been strong over the past month. Is that strength sustainable? Yes, we believe, although there are plenty of moving parts in the US and abroad with bearing on the greenback’s value.
Life In The Fast Lane
The Fed’s monetary decisions are only as good as the data they’re dependent on. But economic data can be misleading for several reasons. What looks recessionary may simply be a temporary anomaly that gets revised away or followed by strong data the next month. Today, Dr. Ed makes the case that the Fed’s September decision to cut the federal funds rate by 50 basis points was too much, too soon, as subsequent data have shown. If so, inflation could halt its moderating trend and stock market valuations could inflate unduly in a meltup scenario. … Also: The Fed’s estimate of the “neutral” federal funds rate is probably too low. … And: Dr Ed reviews “Lee” (+ +).
Mixed Emotions
The US economy is doing well. So why do surveys suggest that consumers and small businesses are depressed about their financial situations? Among consumers, inflation remains a sore point, Dr. Ed explains. Falling y/y inflation rates are little solace when shoppers are perpetually sticker-shocked, remembering pre-pandemic prices. Other pressure points include less affordable homes than before the pandemic, higher mortgage and interest rates, and the need for parental patronage to help financially strapped adult children. … A persistent problem for business owners is lack of qualified job applicants. Inflation is a top complaint for them as well.
On China, Global Wages& The S&P 493
China’s stock market has lost 8% over the past week. Investors appear to have lost faith that the government’s stimulus will be the answer to that economy’s problems. Eric explains the dubious prospects of trying to stimulate a highly indebted country out of a collapsed property bubble with easier financing. And China’s monetary policy is highly dependent on what the Fed does. If China eases more than the Fed, it risks foreign capital flight. … Also: Melissa looks at wage growth trends in the US and around the world. … And: Joe’s data show the stock market’s leadership broadening beyond the Magnificent-7 to the “S&P 493.”
Will Fed Get Stuck With Sticky Inflation?
By cutting interest rates despite strong economic growth, the Fed now risks overstimulating demand and reviving inflation. Services and wage inflation remain sticky, raising the risk that headline inflation gets stuck above 2.0%. … The bond market agrees with our assessment that the Fed turned abruptly too dovish recently, boosting market expectations for long-term inflation higher. ... Now, the FOMC's obsession with the so-called neutral federal funds rate or r* may be coming back to bite them as the notion of the real federal funds rate is upended by these increased inflation expectations.
Happy Second Birthday!
As the bull market turns two, Dr. Ed fondly recollects the performance of the young raging bull. At times, the bull charged and at times stomped its hooves on the ground in reaction to the monetary policy, earnings expectations, and economic outlooks waved in front of it. Yet the bull trampled even our heady expectations this year, passing our year-end S&P 500 forecast ahead of schedule. At the risk of more hoof marks, we’re maintaining our year-end targets of 5800, 6300, and 6800 for 2024-26. They reflect a bullish earnings outlook, which reflects rising profit margins in our Roaring 2020s scenario, hinging on a tech-led productivity boom. We might increase our 30% meltup odds if the bull keeps charging ahead over the remainder of this year.
The Shifting Sands Of Global Manufacturing
Manufacturing sectors have been contracting in many countries of the world, although not in the US or Vietnam. Today, Melissa examines the troubling trends behind the downturns, globally and for specific countries. Notably, China remains the world’s number-one producer of manufactured products, though its position is rapidly eroding. Conversely, Vietnam’s pro-business policies are attracting global manufacturers seeking to diversify their supply chains; foreign direct investment in Vietnam rose 7% last year. … The era of green automation is also changing the global manufacturing landscape, with innovations that improve operational efficiency and address environmental challenges.
The Fed’s Mission Hasn’t Been Accomplished
The Fed’s now ended tightening didn’t quite get inflation down to its mandated 2.0% target; but by easing now, the Fed presumes it will get there. It’s too early for victory laps, believe Ed and Eric. By overheating the economy, easing could jeopardize some of the inflation progress made. Today, Eric details the risks of that scenario and explains what he and Ed are watching for as they keep close eyes on inflation. … Also: Joe notes that the net earnings estimate revisions data he monitors jibe with YRI’s strong economic outlook. Although net estimate revisions are negative, the cutting isn’t as severe as usual.
On Jobs, Bonds & Liquidity
Hard-landers who thought a recession was taking root in the labor market were mistaken, Eric explains. He and Ed interpreted the recent rise in unemployment as signifying a normalizing labor market—not one that was weakening in an alarming fashion. … Also: Stronger-than-expected economic indicators have dramatically curtailed expectations for further Fed rate cuts. … And: The September 30 tapping of the Fed’s standing repo facility is nothing to worry about.
A Dozen Reasons For None-And-Done
It takes a lot to kill an economic expansion, often a credit crisis during periods of Fed tightening that escalates into a credit crunch and a recession. The latest tightening has ended, and that didn’t happen. Now the latest batch of strong economic data should finally lay to rest the diehard hard-landers’ recession warnings. It should also cast doubt on whether the Fed needed to ease at all on September 18. Ed and Eric think not and predict that the Fed won’t cut the federal funds rate further this year. Dr Ed offers 12 reasons that “none-and-done” would be the Fed’s most prudent and plausible policy path for the remainder of the year. … He also reviews “Wild Rose” (+).
Oil, Investment Banks & Flying Cars
If war erupts in the Middle East, the higher oil prices that OPEC+ has been unable to achieve will be realized. Jackie examines the market dynamics that have kept oil prices down as well as the EIA’s outlook for them next year. … With a fiscal quarter ending a month before most, Jefferies Financial is always the first of its investment banking peers to report quarterly results. Good news: Jefferies’ good Q3 bodes well for the industry as a whole. ... And: Cars can fly. Much investment has gone into launching flying car ventures. So when will airborne cars actually dot the skies? Look for them in LA in 2026.
The Economy That Roared
The recent upward revisions to GDP and GDI are significant, suggesting an economy that’s even stronger than many suspected. Eric explains how the various elements interconnect, with stronger GDP than first reported meaning greater output, which means higher productivity and lower labor costs and price inflation. The stronger GDI results from not stronger wages but stronger nonlabor income, which means more savings and support for consumer spending. Concerns about the labor market are misplaced. … Also: Melissa reports on China’s latest stimulus measures and Japan’s new prime minister. … And: Joe explains that S&P’s quarterly index rebalancings have changed some component companies, resulting in apples-to-oranges comparisons to recent stats lacking much significance.
On Labor, AI & Election Uncertainty
If AI proves to be as transformative as many expect, its adoption has barely gotten off the ground. As AI proliferates—accelerating the productivity growth that’s central to our Roaring 2020s scenario—will it mean mass layoffs? Eric examines the labor market and the drivers of tech investment, concluding that most workers are not at risk of losing their jobs or bargaining power over employers. … The Fed’s new easing cycle removes a big source of uncertainty for corporate decision makers. But election uncertainty is keeping them cautious, according to research by the Fed and The Conference Board. That uncertainty will soon be over.
No Hard Feelings
The permabears have fueled much negativity about the outlooks for the US economy and stock market. Their analyses often don’t hold up to scrutiny. Today, Dr Ed puts the prospects of a recession and a bear market into perspective, historically and in light of recent BEA data releases. The data show the economy to be remarkably resilient, including the goods producing sector. … With a strong economy and no recession in sight, why did the Fed ease last week? Answer: To boost demand for labor and reduce unemployment. But easing won’t rectify a mismatch between the skills employers seek and the skills job seekers offer. ... And: Dr Ed reviews “The Perfect Couple” (+).
On Homebuilders, China & AI
The interest-rate-sensitive S&P 500 Homebuilding industry index counterintuitively sank after the Fed launched its new easing cycle; the stocks had already rallied in anticipation of the move. Jackie examines whether the correction was warranted. The industry’s forward revenues and earnings are historically high, and KB Homes reported a decent August quarter. But do valuations capture the potential new competition from existing homes amid lower mortgage rates? … Also: China has been trying to stimulate its economy with a raft of new measures. But several business- and consumer-unfriendly government policies undermine its objectives. … And a look at the surprising underperformance of the largest AI-investing ETFs.
On Productivity Growth, SMidCaps & India
Our Roaring 2020s scenario for the economy is our base case, to which we assign a 50% probability. Its linchpin: robust productivity growth and the bevy of benefits it brings to corporate America and the economy at large. By our favored measure, productivity growth is accelerating. Today, Eric corroborates that using Joe’s data on S&P 500 companies’ collective earnings and margin fundamentals. … Also: Joe looks at how the earnings of companies in the three S&P capitalization-sized indexes fared during the Fed’s recent tightening cycle. … Finally, Melissa reports on India’s resilient economy and an ambitious proposal to reform national elections processes there.
The Consequences Of Cutting Rates
The FOMC’s 50 bps rate cut last week stimulates an economy that doesn’t need much, if any, extra help, in our opinion. Eric takes a look at the labor market and long-term inflation expectations to describe why we believe easier monetary policy increases the odds of a 1990s-style stock market meltup and risks higher inflation in the future. Even so, our current Roaring 2020s base case is that productivity will allow for more growth with less inflation. Any resulting meltup is more likely to be followed by a correction than a bear market.
Fed’s Dream Economy Versus Ours
The Fed is starting a new easing cycle to avoid a recession that we don’t see coming, based on concern about labor market deterioration that we don’t see occurring. Today, Dr. Ed compares and contrasts the world according to the Fed with the world according to our team, explaining the thinking behind both. Notably, the Fed is risking its credibility by easing without regard for election results, as both presidential candidates’ policies would raise the federal deficit in a one-party sweep, an inflationary prospect. We are rooting for gridlock. … Also: Three misleading economic indicators continue to stoke recession fears unduly. … And: Dr. Ed reviews “The Unlikely Pilgrimage of Harold Fry” (+).
China, Lithium & OpenAI o1
With China’s economy moribund, particularly the consumer sector, Chinese manufacturers are flooding global markets with their inexpensive wares. Besides exporting goods, they’re essentially exporting deflation. Foreign governments aren’t pleased. Jackie reports on this state of affairs and what US and European governments may do in response. … Also: The price of lithium has been depressed by multiple forces for the past two years but may be poised to recover. … And in our Disruptive Technologies segment, OpenAI’s new and improved language program, OpenAI o1, features more sophisticated thinking and more accurate answers than its predecessor, ChatGPT-4o.
On Consumers, The Eurozone & S&P 500 Share Count
August’s rise in retail sales surprised many a hard-lander. We weren’t surprised given our strong outlook for consumer spending, based on the growing labor market and rising real wages. Consumer credit doesn't threaten a balance sheet recession, Eric explains, and dissaving isn't worrying. We see more risk of an overheating economy as the Fed lowers rates than an anemic one requiring monetary support. … Also: Melissa explains the comprehensive plan to jumpstart economic growth in Europe, courtesy of former ECB chief Mario Draghi. … And: Joe shares data on share counts, falling more slowly amid elevated valuations as companies spend more on AI, less on share repurchasing.
QT, MBS & BOJ
The Fed is set to ease monetary policy by lowering the federal funds rate this week, but it will still be tightening policy by shrinking its balance sheet. However, as Eric explains, quantitative tightening hasn't been very effective—reserves are much higher today than pre-pandemic. Has the Fed really tightened policy that much, and what will happen when it ends QT? … Also: the investment opportunity represented by mortgage-backed securities. … And: Where BOJ policy may be headed and what it means for the yen.
50 Basis Points: Baked Or Half Baked?
It’s a foregone conclusion that the Federal Open Market Committee will be launching a new monetary easing cycle by cutting the federal funds rate when it meets this week. But a weighty decision faces the committee: To cut by 50 basis points or not to cut that much? Fifty is the usual amount kicking off an easing cycle, but the economic circumstances are different this time: There’s no recession clearly barreling toward us. Dr. Ed explores the pros and cons of the decision before the committee, concluding that easing by 25 bps would be the wiser course.
Defense, P/Es &DNA Origami
Rapid earnings growth has sent the S&P 500 Aerospace & Defense industry’s share price index rocketing skyward. But how long can investors look past looming clouds? Jackie examines the industry’s fundamentals and valuation trajectories as well as what could happen to a primary funding source—the US defense budget—in the next administration. … The S&P 500 is down from its July 16 peak, but its valuation is roughly flat. Some S&P 500 sectors have been pulling it up and others pushing it down. … Also: The cancer-fighting potential of DNA origami.