Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
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 (+ + +).
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.