Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Gold Medals
If economic performance were an Olympic sport, America would sweep up gold medals. The US economy hit record-high real GDP, real consumer spending, and real consumption per household (a barometer for standards of living) last quarter. It has achieved the feat of “immaculate disinflation”—falling inflation without recessionary fallout—as PCED inflation is fast approaching the Fed’s 2.0% target. Real capital spending by businesses also stood at a record high during Q2. The US housing market is the notable exception to the US economy’s remarkable performance, with weak housing starts and residential investment. … And: Dr. Ed reviews “I Am: Celine Dion” (+++).
Large Caps & Electric Trucks
Expectations of Fed easing have turbocharged small- and mid-cap stocks: The S&P 400 MidCaps and S&P 600 SmallCaps have left the S&P 500 in the dust over the past two weeks. Today, Jackie points out the huge advantages that large caps have over their smaller counterparts, including the financial flexibility afforded by hordes of cash as well as better prospects for revenues, earnings, and profit margins. … In our Disruptive Technologies segment: a look at the fraught road ahead for electric truck adoption as well as the opportunities some manufacturers see.
Currencies, Central Banks,MegaCap-8 Earnings
There are plenty of dollar detractors around, but their arguments don’t hold much weight against a big reason that demand for the greenback will remain strong: Foreign investors need dollars to invest in US assets. Eric is confident that continued strong foreign demand for US stocks and bonds will keep the US dollar reigning supreme. … Also: Melissa globe-trots to check in on central banks in Europe, Japan, and China—where monetary policy remains restrictive, accommodative, and downright easy, respectively. … And: As the stock market leadership rotates away from the MegaCap-8, Joe shares how their vital stats compare to the rest of the market during the bull run to date.
Trump 2.0, No Recession& Interest-Rate Cuts
The policy priorities of Trump 2.0 would likely have mixed effects on inflation, the labor market, trade, and government borrowing—Eric sorts out the investment implications. … Also: The latest economic indicators still don’t suggest a recession anytime soon, and there are signs of improvement in the slumping goods-producing sector. … And: The recent stock market volatility is not indicative of a broader risk-off move by investors.
Dueling Views
Characterizing the investing backdrop at this juncture are big unknowns about the near-term future, such as which administration will be controlling fiscal policy six months from now and what monetary policy will be at that time. So it’s no wonder that multiple consensus viewpoints seem to be moving financial markets this way and that. Today, Dr. Ed examines what’s been driving the commodities, fixed income, currencies, and equities markets and discusses his takeaways for the economic and financial market outlooks. ... And: Dr. Ed pans the movie “Civil War” (- – -).
Banks, Consumers & mRNA
Investors in the stocks of big banks are looking forward to the earnings boosts likely in a lower-interest-rate environment, and their optimism has fueled nice share price momentum. The S&P 500 Financials sector lags only tech-related sectors ytd. Yet there were some concerning aspects of the major banks’ Q2 earnings reports; their robust investment and trading business saved the day. … Are consumers’ rising credit-card delinquencies a warning sign for consumer spending? No, reports Jackie; the evidence suggests that delinquency rates are simply normalizing after pandemic-related distortions. … And: Moderna is leveraging the mRNA technology of its Covid vaccines into treatments for a wide range of conditions.
Retail Sales, India & S&P 500 Earnings
As investors position portfolios for lower interest rates, Eric takes the pulse of goods producers, which stand to benefit from a lower-interest-rate environment more than services providers. … Melissa travels to India, where Prime Minister Modi just won a third term but without broad support. Does he have enough support to pull off planned reforms and meet ambitious economic goals? That’s unclear. It will take substantial fiscal support for the Indian economy to sustain its soaring GDP growth trajectory. … Many S&P 500 Financials firms have already reported Q2 earnings; Joe says their aggregate y/y revenues growth was impressive, but their bottom-line growth not so much—though earnings did beat estimates.
Fiscal Excesses& Bond Volatility
Would a Republican sweep in November boost the federal deficit? The Republicans would certainly extend Trump’s 2017 tax cuts beyond 2025. But they might also rein in federal government outlays. In any case, the initial reaction of the bond market to Trump’s dodging the bullet on Saturday was a slight disinversion of the yield curve, perhaps in anticipation of wider deficits. … Eric reviews the 60/40 portfolio rule and how unrestrained government spending and deficits can impact financial markets. … While the federal budget deficit shrank during the first nine months of this fiscal year, the Treasury still has plenty of securities to sell investors. … Eric also reviews the Sahm Rule.
Immaculate Disinflation!
In congressional testimony last week, Fed Chair Powell sounded more dovish than he has this tightening cycle. That clinched financial markets’ growing expectation that the Fed would cut the federal funds rate as early as September. We believe so too. Now that inflation is closing in on the Fed’s 2.0% target, Fed officials are increasingly focused on keeping the unemployment rate low. … From today’s vantage point, it’s clear that “immaculate disinflation”—the lowering of inflation without a recession—is possible, as we had predicted back in September 2022.
Homebuilders, Regulations & Microcapacitors
With today’s unusual housing market dynamics undercutting the affordability of new homes, homebuilders are offering buyers sales incentives. So far, they’re working to companies’ advantage, Jackie reports: Lennar’s May-quarter revenue and earnings both jumped around 9% y/y. We continue to watch rising inventories. … A recent Supreme Court ruling effectively transfers power from the government’s regulatory agencies to the judiciary system. That could mean softer regulations on Corporate America going forward and lots of litigation. … And in our Disruptive Technologies segment: A super powerful microcapacitor being developed could help meet the growing demand for mini energy storage units in microdevices like Internet-of-Things sensors and AI processors.
Eurozone, China& Q2 Earnings
A sea of troubles for European economies—including sagging growth, political headwinds, and an EC crackdown on fiscal miscreants—reinforces our Stay Home (versus Go Global) equity investing bias. … Chinese companies are evading US import tariffs by funneling their exports through intermediary countries before they reach US consumers, jeopardizing the US, Mexico, and Canada free-trade alliance. … Our analysis of tariff-related events and IMF trade statistics points to a grim outlook for direct exports from China to the US. … Also: Joe notes an anomaly in the S&P 500’s Q2 EPS estimate revisions over the course of the quarter: They didn’t decline as usual but remained unchanged. That bodes well for earnings surprises.
Assessing US Labor Market& Global Economy
We don’t think the Fed ought to lower interest rates this year, unlike many who rest their case on the rising unemployment rate. The BLS’s household measure of employment has been falling since November even as the BLS’s payroll measure has surged to new highs. Eric explains why we pay attention to the latter, which suggests the labor market isn't coming apart at the seams. … Our analysis of the CEI’s components suggests a similar story for the broader US economy, e.g., continued growth at a moderating pace. … As for the global economy, we see muddling overall growth and a bifurcation under the hood, with emerging economies powering global production while advanced economies specialize in producing services.
It’s Still A Bull Market Until Further Notice
Signs that the Fed might lower the federal funds rate soon have sent stocks soaring, even though those signs were weak economic data. So the Fed Put is back. We’re concerned that the Fed might ease too soon, switching its mandate focus from inflation to unemployment. That could be a wrong move given the likelihoods that the soft patch won’t grow into a recession and that trade policies next year are bound to be inflationary. … Our S&P 500 targets might be too conservative if the slow melt-up continues. Then again, the dearth of bears in the market is a contrarian bearish sign. … As for the labor market, we don’t see weakness in the data but normalization. … Dr. Ed reviews “Cabrini” (+ + +)
Earnings In ’25 & AI Exuberance
With this year half over, it’s time to look at which S&P 500 sectors and industries embody Wall Street analysts’ highest expectations for earnings rebounds next year. Jackie has the data and discusses what’s been going on within these industries to light fuses under their earnings growth. … And in our Disruptive Technologies segment: We’re the first to agree that widespread adoption of AI will be a game-changer for many an industry. But tech CEOs are making some pretty wild claims. Is the potential of AI really all they’re cracking it up to be?
Inflation Heading Toward Soft Landing
Personal consumption expenditures data for May suggest clear skies on both the inflation and income fronts: The PCED has been gliding steadily earthward and looks on course to reach the Fed’s 2.0% y/y destination for it by year-end. Consumer spending has been showing no sign of retrenchment, and consumption trends jibe with our rosy economic outlook. Moderating inflation with a robust economy argue against the Fed’s easing this year. So do stimulative fiscal policy, low unemployment, and the ramifications of cutting rates on inflation and financial markets. We’re in the small camp that would prefer not to see the federal funds rate lowered this year.
Freight, Travel & AI-Trained Cars
Jackie has been mining information from earnings conference calls for insights into industry and economic trends. For example, air freight demand is unexpectedly strong as a result of shippers’ Red Sea travails; that and the end of inventory drawdowns could benefit FedEx. … Earnings reports from Pool Corporation and Carnival Cruise Line suggest that consumers aren’t sinking money into backyard pools as much anymore, but they’re dropping it with abandon on cruise ships and air travel. … And in our Disruptive Technologies segment: how AI will accelerate the development of autonomous driving systems.
EU’s Foundation Cracking?
The European Union is trying to rein in bloc nations’ budgets just as protectionist parties swell in European elections. Rising fiscal and political risks are weighing on European asset prices. We expect those headwinds to be tailwinds for US assets. We reiterate our Stay Home investment strategy recommendation.
Fiscal Follies
The federal budget deficit is far higher than typical during economic expansions—and current estimates are likely too low. The deficit is unlikely to shrink anytime soon absent a debt crisis, and it’s increasing the supply of US Treasuries to the point of rivaling demand. The Treasury Department’s newly adopted debt issuance strategy is tenuous and could lead to more market volatility. … It’s not all doom and gloom: Treasuries are buoyed by the US dollar's reserve currency status. Strong productivity in our Roaring 2020s scenario can keep the debt load manageable as well. No crisis looms.
Bull Tramples Even Wall Street’s Bulls
The bull market has stampeded through some of the most optimistic price targets on Wall Street including ours. While we are sticking with our S&P 500 yearend target of 5400, we’re looking forward to the bull run lifting the index to 6000 by yearend 2025 and 6500 by yearend 2026. … Q1 earnings beat expectations causing industry analysts to revise upward their consensus estimates for this year and next. We lay out our forecast for continued revenues and earnings growth during the Roaring 2020s. ... The stock market may be in a meltup, so we revisit the 1990s for some guidance. The S&P 500 Information Technology and Communication Services sectors are as large now as they were during the dot-com bubble, but today they generate a larger percentage of the S&P 500’s earnings.
Homebuilders, Tech & Batteries
The stocks of homebuilders, which rallied sharply over the past two years, have stalled over the past two months. Jackie takes a look at the recent earnings reports of Lennar and KB Home. Affordability is a problem that lower mortgage rates could help solve. … Nvidia is officially the market’s most valuable company and Nasdaq is trouncing the Dow. We examine just how handily the market leaders are leaving everyone else in the dust. … US EV sales stalled in Q1. It may take more powerful but less expensive batteries to get sales moving again. Here’s what some researchers have cooking in their laboratories.
TAMED Tales
Indicators that often accurately signaled that a recession is on the horizon have missed the mark. Eric takes a look at why the economy has continued to thrive despite numerous Fed interest rate hikes and a plunging LEI. Thank the services and technology sectors as well as deflation imported from China. … We expect the yield curve will remain inverted for a while longer as the Fed cuts interest rates very slowly and the 10-year Treasury yield bounces between 4%-5%. … The Sahm Rule is close to warning that a recession is imminent or upon us. But after a closer look at why May’s unemployment rate ticked up—blame college kids—we believe the labor market remains robust.
The Phillips Curve Ball
The rates of unemployment and inflation aren’t always inversely correlated, as the Phillips Curve model posits. Historically, they have often been; in recent times, not so much. The problem with the model is that it doesn’t account for the effects of productivity growth on price inflation. … The high rates of goods inflation experienced after the pandemic proved to be transitory, as we had anticipated. Services inflation has been more persistent but is moderating too. Pulling both down are assorted disinflationary forces. … Consumer sentiment fell in early June. We’re not sure why exactly but suggest some possibilities related to inflation, the labor market, and the uninspiring presidential race options.
Inflation Remains On Moderating Track
As expected, the Fed opted not to lower the federal funds rate at yesterday’s FOMC meeting, but participants’ median economic projections changed considerably since March and now suggest only one cut this year (though we expect none). Their projections depict a robust economy doing just fine with rates this high. … Yesterday’s CPI release for May confirmed that the Fed’s 2.0% inflation target is in the crosshairs, as Eric details. … Even so, inflation frustration among consumers hasn’t abated as the rates of inflation have cooled. How much more consumers pay now than before the pandemic is what sticks in their craw; so do higher interest rates and less affordable housing.
As The World Turns
We expect global economic growth to continue to muddle along, neither booming nor busting, through 2025. Today, we review the key economic indicators we monitor to assess the strength of global growth, including world production and exports, commodity prices, and trade. … Also: Joe looks at how much the top-capitalization stocks in the top-performing country MSCIs have been boosting those indexes’ ytd performances. … And: Melissa reports on the ECB’s first interest rate cut since 2019, which will likely be “one and done,” and on the rising popularity in European country politics of nationalist parties—which could threaten the EU’s cohesion.
The Fed Ahead
We expect that Wednesday’s FOMC decision will be to maintain the federal funds rate at its current high level, where it’s been for nearly a year. Today, Eric discusses the higher-for-longer phenomenon, including why this tightening cycle has defied both historical precedent and expectations just six months ago. The economy’s resilience combined with labor market and inflation conditions argue against lowering rates now; doing so might incite a stock market meltup (and subsequent meltdown). … While the Fed typically leads other central banks in interest-rate moves, there are good reasons it’s lagging in easing this time. … We don’t buy the theories of monetarists that M2 matters vitally to inflation or the stock market.