Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
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.
More On The Carry Trade, The Eurozone & Earnings
While carry traders likely have more yen-funded positions to unwind, we’re not worried about another bout of extreme market volatility as a result. We don’t see the conditions that sparked the great unwinding exacerbating, Eric explains. The Bank of Japan is unlikely to tighten dramatically with the yen’s recent strength helping to tame inflation there. The yen is unlikely to rise dramatically more, tethered by tamer inflation in Japan and strong economic growth in the US. … Also: Melissa reviews the Eurozone’s daunting economic challenges. … And: Joe gives us an overview of the strong Q3 earnings that analysts are forecasting for the S&P 500, the Magnificent-7, and the “S&P 493.”
On The Labor Market & Productivity
Yes, the unemployment rate has inched up over the past year. No, that doesn’t reflect a weakening of the economy at large. Permanent layoffs are muted; wages are rising; CEOs plan to hire. No unemployment spike heralding a recession is likely. Fed officials Waller and Williams agree, so we expect interest-rate cutting to be shallow and at a measured pace. … Revised Q2 economic output suggests an impressive rate of productivity growth last quarter, boding well for corporate profit margins and the no-recession scenario.
Another Growth Scare
The latest batch of labor market indicators has caused a temporary “growth scare,” in our opinion. Concerns that economic growth is slowing have convinced the markets that the Fed will open up the easing spigots and cut the federal funds rate by more than we expect. … Previous peaks in the yield-curve spread suggest that the bond yield is close to bottoming. … There were bright spots in the employment report too: The payroll and household surveys weren’t all that bad. … And: Dr. Ed reviews “Reagan” with one star for the movie but three stars for the man.
Retailers, Markets & AI
Why did the managements of Walmart and Dollar General paint vastly different pictures of low-income consumers in recent Q2 earnings calls? Jackie explores the differences in the two companies’ business models and operating landscapes that account for their divergent Q2 results and impressions of consumer spending behavior. … Also: a look at which S&P 500 industries and sectors shifted into and out of market leadership positions during the summer’s rebound. … And: Wall Street firms are implementing AI initiatives fast and furiously. The operating efficiencies that result could mean that recent finance grads with sights set on the Street need a Plan B.
GDP Vs GDI Debate; Mexico’s Failing Democracy
If you’ve heard that Gross Domestic Income is a better measure of economic activity than Gross Domestic Product, forget it. The two are sending divergent signals currently, with the former much weaker than the latter; but GDP is the one we trust the most currently. Eric explains why. … The US economy has become less interest-rate sensitive than it’s been in the past, so another thing to forget about are the “long and variable lags” before the economy reacts to the latest round of tightening. They’re not coming. … Also: Melissa updates us on the Mexico’s stock market and political developments, warning investors to tread carefully there.
Someday, There Will Be A Recession
Today, Dr. Ed puts the notion of a recession still to come into perspective. Since 1945, the US economy has been in recession 14% of the time. Most of the nine recessions stemmed from the credit-crunching effects of monetary tightening. The most recent tightening round won’t likely trigger a recession despite the “long and variable lag” often noted before the economy reacts to tightening. That’s because this tightening round is different in many respects, one being the “Immaculate Disinflation” it has achieved (moderating inflation without a recession). For multiple reasons, we think it’s wrong to expect a hard landing still to unfold from this tightening round. … Q3 is shaping up as another immaculate quarter. Also: Dr. Ed reviews “The Tourist” (+).
China, Nvidia & Humanoid Robots
The collapse of China’s real estate segment and the response of the Chinese government—stimulating not consumption but production—are keeping the country’s exports high and effectively exporting deflation along with goods. This has ramifications for the economies of its trading partners, as Jackie reports. China’s weak economy is hurting multinational companies doing business there and domestic corporations alike. … Also: A look at Nvidia’s fundamental and valuation stats in the wake of strong earnings that nonetheless failed to excite investors. … And in our Disruptive Technologies segment, more on humanoid robots: Optimus and Figure 2.0.
On Going Global, Volatile Oil & Earnings Revisions
While we recommend a “Stay Home” versus “Go Global” investment allocation approach, we note that the EU MSCI is trading at a big discount to the US MSCI. But challenges constraining economic growth do abound in Europe. Today, Eric surveys the investment fundamentals vis-à-vis valuations in both EU and EM stock markets, finding the latter more attractive. … Also: Melissa surveys the forces making for a volatile global oil market. … And Joe updates us on the latest batch of analysts’ net estimate revisions data for August—a month that saw net earnings estimates rise as net revenues estimates fell.
On Another New Normal, Banks & Powell
With the growing economy set to benefit from interest-rate cuts and a weaker dollar, will inflation heat up again? We’re sanguine on the inflation outlook in the near term, but not as certain about the long run, which will depend on the outcome of November’s elections. In our opinion, the economy is normalizing from pandemic-induced distortions to a higher “norm,” meaning higher potential GDP, higher productivity growth, and a higher neutral interest rate. ... The economic backdrop should lift Financials stocks broadly, but large banks have more winds at their backs than small ones. … And: Why is Powell suddenly so dovish?
Powell’s Latest Pivot Won’t Be His Last
It was an unambiguously dovish Fed Chair Powell who described the Fed’s intentions for US monetary policy at the Jackson Hole gathering of global central bankers on Friday. In our opinion, he was too dovish for this point in the economic cycle. After all, successful execution of the Fed’s dual mandate basically has been achieved: Inflation is headed on autopilot down to the 2.0% target (thanks to solid productivity gains) and unemployment remains low. Why tamper with success? Powell’s pivot to dovishness assured the financial markets that they were right to expect more easing after the widely anticipated September rate cut. But if the labor market remains resilient or inflation reheats, Powell likely will have to pivot again. … And Dr. Ed favorably reviews “Young Woman And The Sea” (+++).
On AI, Payrolls & Global Economy
AI’s power to transform operations in nearly every industry is bound to feed the productivity growth boom we expect, the crux of our Roaring 2020s scenario. But the unbridled propagation of AI poses some challenges. Dr. Ed looks at the AI question from multiple angles, noting prudent precautions to using AI—like restricting its access to unvetted Internet content. … Eric warns that the financial markets may be overly confident that the Fed will cut rates after September despite the strong economic data we expect for August. … And Melissa shares an update on the global export landscape.
On The Carry Trade, Japan & Earnings
The recent carry-trade unwind triggered unnerving market declines that weren’t warranted by asset fundamentals. But Dr. Ed and Eric don’t think investors need to worry about a repeat performance. Carry trades continue, but positions are less extreme now. And if Friday’s statements by Fed Chair Powell and BOJ Governor Ueda are less dovish and more dovish, respectively, the yen would weaken against the dollar—also helping to avoid another carry-trade unwind. … Also: Melissa reports on Japan’s remarkable economic revival. … And: Joe’s data suggest a chance that 2024 could be a rare year of rising earnings, revenue, and profit margin estimates.
Global Growth Perspective: US Stands Out
Not only isn’t a recession headed down the pike, but the US economy is emerging from the pandemic tunnel with stronger potential GDP than it had prior to the pandemic. Today, Eric explains why he and Dr. Ed believe that potential GDP growth is 4.0% annually, more than twice FOMC members’ latest consensus forecast for long-run real GDP of 1.8%. Why is the economy resetting at a higher level? The growing labor force and the productivity growth boom we expect—our Roaring 2020s thesis—provide tailwinds. … The global economy is also gaining steam, even though China’s economy remains moribund.