Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Updates On China, The UK & Earnings
China gargantuan trade surplus won’t shrink until policymakers stimulate domestic demand. Yuan depreciation now risks capital flight. … In the UK, gilt yields have reached multi-year highs, raising the government’s borrowing costs to levels that might jeopardize its borrowing plans. … Joe has good news for US investors: If the upcoming Q4 earnings season follows the historical pattern, analysts’ already lofty earnings estimates are too low. Joe thinks S&P 500 companies could turn in aggregate y/y earnings growth as steep as 12%.
Fed’s Switcheroos At FOMC & QT
Is this year’s rotation of voting members on the FOMC likely to shift the monetary policy needle? Which way? Today, Eric identifies the new hawks and doves and speculates about how they might vote at January’s meeting. … Also: Although the Fed has been easing monetary policy, its quantitative tightening continues. Yet bank reserves remain elevated notwithstanding the Fed’s balance-sheet runoff. QT may not be terminated until bank reserves fall enough to increase short-term interest rates or until higher long-term bond yields put undue pressure on the economy.
The Recession Is Over, Again!
The financial markets have been recalibrating their expectations for monetary policy since the FOMC’s December meeting and their expectations for economic changes under the incoming Trump 2.0 administration since Election Day. In this context, Friday’s strong employment report only served to cement investors’ sense that the Fed should pause its easing. Both bond and stock markets reacted like the sky was falling. We’re not surprised by this January correction, and we view it as healthy: The markets are gaining a more realistic sense of the current situation, recognizing that interest rates will stay higher (i.e., normal) for longer, while the economy remains resilient. A strong Q4 earnings season should help to restore shaken investors’ confidence. ... Also: Dr. Ed pans “The Substance” (- – -).
AI, Metals & Solar
Today, Jackie recaps takeaways from this week’s Consumer Electronics Show—including Nvidia CEO Jensen Huang’s insights about the future of artificial intelligence and the most notable of the many AI-enhanced high-tech gadgets unveiled at the convention. … Also: Industrial metals appear to be a shiny new investment theme for the new year; their prices have started the year on a positive note for several reasons. … And in our Disruptive Technologies segment, researchers have developed more ways to catch rays for solar power on the go.
Updating Global Economy & S&P 500 Earnings
Today, Melissa takes us on a world tour, reviewing the takeaways from the latest economic releases of major economies. Those in Europe are a mixed bag, with the tourist economies of Spain and Italy looking good as Germany struggles. In Asia, the fast-growing Indian economy stands head and shoulders above the rest, though Japan’s is improving. The “ABC” commodities exporting economies—Australia, Brazil, and Canda—are underperforming for country-specific reasons. … Also: Joe reviews how several S&P indexes performed last year on the fundamental measures of forward revenues, earnings, and profit margins, and he shares takeaways from his new breadth data for the S&P’s three market-capitalization indexes.
Labor Market Remains In Good Shape
Our conviction in the labor market’s continued health wasn’t shaken by the increase in unemployment that triggered the Sahm Rule a few months ago. Today, Eric explains why we dismissed this signal and why we expect revised BLS data next month to show payroll employment at another record high. A greater influx of immigrants than the Census Bureau initially realized has boosted labor market participation, which boosted unemployment. … High rates of immigration have supported GDP growth by increasing aggregate hours worked along with the productivity growth boom now underway. We expect the productivity boom to continue, playing a big role in our Roaring 2020s scenario, with its main driver being the widespread adoption of new technologies as immigration slows.
Risks & Reward In 2025
The January Barometer and January Effect have been interesting statistical regularities that may not have much investment usefulness. It’s better to stay in the stock market whatever the month brings than to try and execute exits and entrances based on the calendar. Over time, the market has a bullish bias, which is why we do too. … Today, Dr Ed lists what could go right for the stock market this year—including better-than-expected earnings, technological advances, and a strong economy buoyed by consumer spending—and what could go wrong. On that list, inspired by the worries of more bearish prognosticators, are the known unknown economic effects of Trump 2.0 policies and how the bond market may respond to them. … Dr Ed reviews “Blitz” (+).
AI, Earnings & More AI
Twenty-twenty-four no doubt will be remembered by equities investors as the year that everything AI-related trounced everything not. Jackie has the striking performance data to prove it. … Also: For some of the fastest-growing S&P 500 sectors this year, earnings could decelerate sharply in 2025 if analysts’ estimates pan out. … And: Websites breathed life into the Internet and apps into the iPhone. Now AI has opened the floodgates to the development of AI-infused apps that can expedite everything from creative endeavors to routine tasks.
Three Challenged Central Banks
Europe, Japan, and China all face economic challenges that monetary policy could help address, but none of their central banks seems ready to deploy the monetary firepower at their disposal, Melissa and Eric report. In Europe, the ECB’s recent rate cut was too small to move the economic revival needle, and the ECB chief wants fiscal policymakers to step up. In Japan, the BOJ is in a watching-and-waiting mode before hiking rates again after its first rate hike touched off a carry-trade ruckus. In China, the government seems unlikely to resort to aggressive rate cutting to stimulate the consumer sector, pinning its hopes instead on fiscal policy and central bank asset purchases.
Thinking About 2025
We’re no longer the most bullish strategists on the block. We project a 15% advance in the S&P 500 next year, whereas others see reason to expect 20%. With bullishness abounding, contrarian indicators are flashing red, and we see the potential for a market correction early next year. Today, Eric details YRI’s positions on the economic outlook, which is supported by brisk consumer and corporate spending and rising productivity growth; the inflation outlook, which is looking sticky above the Fed’s target; what the Fed is likely to do next; and the valuation and fundamentals assumptions that underpin our stock market forecast.
Inflation: The Good, The Bad & The Ugly
Lots of crosscurrents are converging to determine the course of inflation in 2025. So projecting that course takes seeing where those currents are headed, predicting with the aid of historical correlations how they’ll likely impact inflation, then overlaying potential economic scenarios to see how they change the narrative. The result: Dr Ed’s three inflation scenarios—the Good, the Bad, and the Ugly. In the Good, rising productivity growth moderates inflation even as it spurs economic growth; that’s the crux of our Roaring 2020s economic scenario and is the most likely scenario to play out. The Bad is a witches’ brew of possibilities with bearish inflationary consequences. The Ugly involves a geopolitical crisis catapulting oil prices. That ’70s show seems farfetched these days. ... Also: Dr Ed reviews “Maria” (+).
China, Retail & Hydrogen
China has been getting back at the US for imposing sanctions by targeting easy marks: US companies that do business there. Jackie discusses the tit-for-tat cold war that’s not likely to end soon and the companies, like Nvidia and PVH, caught in the middle. … Also: Two retailers catering to consumers at different ends of the income spectrum both reported underwhelming spending among US consumers last quarter. … And in our Disruptive Technologies segment: Hydrogen holds promise as an important new source of green energy, but realizing that promise has been a long, slow slog.
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’.