Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
To Tell The Truth
How the labor market is doing is critical to the Fed’s setting of monetary policy given its dual mandate to steer the economy away from both too-high unemployment and too-high inflation. But gauging how the labor market is doing can be a stumper: Two different employment indicators point in different directions. … Less ambivalent are the indicators of wage inflation: All point to continued moderation. … We believe the labor market has been normalizing to its pre-pandemic state and remains robust. But what the Fed makes of the labor data and may do in response is another stumper. We’d like to see it keep monetary policy as is for now. ... And: Dr. Ed reviews “A Gentleman in Moscow” (+ + +).
Housing, P/Es & Data Centers
Supply and demand are out of whack in the US housing market, Jackie reports, with unusual forces bearing upon the inventory of homes for sale, home prices, mortgage rates, and affordability. If something’s gotta give, it may be home prices—which could plateau or, in some oversupplied markets, even drop. … Also: a look at S&P 500 sectors’ valuations now versus a year ago; the changes in some may surprise. … And in our Disruptive Technologies segment, a look at AI data centers’ ravenous need for electricity, causing them to locate near existing power sources and investigate the potential of small modular reactors.
S&P 500 Earnings, Japan & India
Today, Joe recaps Q1 results for the S&P 500’s 11 sectors. Record highs in revenues, earnings and profit margins were scarce for reasons of seasonality, but improvements were broad based. More sectors than not logged y/y growth in revenues (eight), in earnings (eight), and q/q margin expansion (seven). … The Bank of Japan is contending with sticky inflation and bond yields above 1% for the first time in years. Will that quell the appetite for US Treasuries from America’s largest foreign creditor? Eric dispels some myths on Japanese demand. … Melissa weighs in on India’s election results, its pricey stock market, and its lofty economic goals.
Wishing Upon An R-Star
Fed officials lately have been talking a lot about “r*”—that ideal level of the federal funds rate that would represent just enough restrictiveness for economic growth without undesirably high inflation or unemployment. R* would be a great monetary policy tool if only it could be pinpointed. But as a notional concept that’s not easily measured, its utility is limited. Today, Eric presents a primer on r*, explaining the variables affecting it and how the Fed’s view of where r* lies affects monetary policy. Some Fed policymakers are theorizing that r* has risen in the post-pandemic era, which explains the economy’s imperviousness to higher interest rates. That would suggest comfortability with “normal-for-longer” interest rates.
Earnings Tales
Our economic and S&P 500 forecasts are underpinned by our forecasts for corporate revenues, earnings, and profit margins. We often compare them to industry analysts’ consensus estimates for S&P 500 companies in aggregate and how they change over time in response to earnings reports. Today, we illustrate this process by showing how data from Q1’s earnings season have fed into our own annual and forward EPS estimates, which multiplied by target forward P/Es produces our S&P 500 targets for year-end 2024, 2025, and 2026 of 5400, 6000, and 6500. Notably, Q1’s reported revenues and earnings edged down from their recent record highs, but analysts’ estimates for the future rose, showing that the quarter’s results were much better than expected. … Also: Dr. Ed reviews “Manhunt” (+ +).
Oil, MegaCaps & Beating Inflammation
OPEC+’s power over the oil market isn’t what it used to be. As non-OPEC producers from various countries drive up global production, the cartel must decide whether or not to extend the production cuts it started implementing two years ago. Jackie looks at the dynamics of an industry that we've considered a hedge against the uncertainties of war. … Also: Joe has isolated the top seven highest-capitalization companies of the S&P 500 Pure Growth and S&P 500 Pure Value indexes, creating MegaCap-7 Pure Growth and MegaCap-7 Pure Value. He compares the groups’ capitalizations and ytd performances. … And: Might a new drug for a rare lung disease have much wider applications?
A Less Interest-Rate-Sensitive US Economy; A Less Investable Mexican Economy
The US economy has been evolving, and it’s time to retire some old rules of thumb about how it works. Sources of financing have diversified so much, Eric reports, that banks’ lending standards imply less about credit conditions than they used to. And the shift from a mostly goods-producing economy to an increasingly services-providing one means that credit conditions in turn imply less about the state of the economy than they used to, as services providers depend less on credit than goods producers do. So banks’ tightening lending standards no longer presage credit crunches or recessions. … Also: Melissa ventures to Mexico, where drug cartels are so entrenched in the economy that some might consider the country increasingly uninvestable.
Will There Be Peace In Our Time?
Geopolitical events can shake up the stock market, sometimes providing buying opportunities. The current geopolitical landscape is unsettled and unsettling, with potentially seismic ramifications on several fronts and lots of uncertainties: Is Putin’s call for negotiations with Ukraine a nonstarter? Is it even real? Are US efforts at brokering peace in the Middle East progressing toward that end or is that notion wishful thinking? Does the heightened pitch of China’s barking at Taiwan indicate a bite is imminent? Will G7 nations’ efforts to insulate their supply chains and economies from the harmful effects of China’s trade policies work? Is the US’s open-border policy a terrorist attack waiting to happen?
Transports, Nvidia & ETs
The economy is strong and the broad stock averages are hitting new records, but the Dow Jones Transportation index has been idling since 2021. What gives? Jackie explores what’s been holding transport stocks back. What she found suggests that it might be time for the stocks to play catchup. … Also: Nvidia reported blowout Q1 earnings and announced a stock split and dividend increase to boot. Results imply the AI party will keep going. … And: With new regulations for its ports, California catalyzes the adoption of electric trucks; electric school buses in the state won’t be far behind.
US Dollar, Gold, Brazil & MegaCap-8
Is the world “de-dollarizing”? Such chatter abounds, but the greenback’s role as the de facto reserve currency is secure, concludes Eric. While China has been buying a lot of gold, it’s not necessarily selling US assets to do so. Indeed, foreign investors have been snapping up US Treasury bonds steadily since 2021, and foreign governments have been swapping local currencies for dollars and investing in US assets at brisk rates. … Also: Melissa’s assessment of Brazil’s investment worthiness is an optimistic one notwithstanding recent flood damage. … And: Just how mega are the MegaCap-8 stocks and how distortive are their hefty capitalizations to the indexes and sectors in which they reside? Joe’s got the data.
Give Them Some Credit
Yes, consumer credit card delinquencies rose during Q1 back up to 2012 levels. But no, that doesn’t indicate the burgeoning stress in the credit system that recession proponents have been waiting (and hoping) for. Consumer borrowing is simply normalizing to historical trends. That’s Eric’s conclusion after a deep dive into consumer credit data. Delinquencies occur mainly among maxed-out consumers, he notes, and their ranks are consistent with pre-pandemic levels. Moreover, most consumers have the income support they need to handle their credit card debt despite “higher-for-longer” interest rates. We see no consumer spending retrenchment ahead, and apparently neither do banks or investors in S&P 500 Consumer Finance stocks.
Dow 40,000 & Counting
Boomer-led households’ collective net worth has skyrocketed 19-fold since 1990. As the generation has lived long and prospered, so has the stock market (rising 40-fold over their adulthood) and the US economy (with nominal GDP up eightfold since 1982). … Looking ahead, our Roaring 2020s scenario assumes faster-than-average growth for S&P 500 earnings, GDP, and productivity. Faster productivity growth should depress unit labor costs and inflation in a process that began last year. More of the same, as we forecast, should boost profit margins to new record highs. … Also: Just ignore the doomsaying LEI. … And: China’s latest attempt to hoist its economy.
Natural Gas, Earnings & VPPs
A warm winter and a pause in the development of future LNG plants has pushed natural gas prices down at a time when domestic demand for the fuel is increasing. Could a hot summer, data center demand, and a Trump presidency send natural gas prices higher? … Good news abounds, with Q1 earnings coming in better than expected. Joe reports that these rosy results have analysts revising their 2024 and 2025 earnings estimates higher. … Virtual power plants—or VPPs—are sprouting up in California, Puerto Rico, Vermont, and South Australia. Jackie looks at this electric development.
China's Tariff Tango & Asia's Demographic Dilemma
After years of pressure from the bursting of its property market, the Chinese economy is showing signs of bottoming. Just to be sure, the government has announced billions in bond sales to provide added stimulus. Eric takes a look at some of the recent economic data that shows green shoots are sprouting. … Chinese stocks certainly seem to believe the worst has passed. Chinese stocks are up, forward profit margins are improving, and the forward P/E remains low compared to its history. … Melissa looks at some of the cultural reasons behind the declining birth rates in Asia and considers how AI may help stretched work forces care for an aging population.
The Federal Budget Deficit Extravaganza
The widening US deficit has raised alarm bells, particularly since it’s doing so during an economic expansion. But if inflation moderates while the economy continues to grow, we might just dodge—or at least push off—the day of reckoning. Eric takes an in-depth look at how fast the US deficit has grown and how much more it’s costing the US government. … Who’s buying all the new Treasury debt issuance? Thank money market funds buying bills. … Retail investors are benefitting from higher interest rates. … How much Treasury bill issuance is too much? A Treasury advisory committee weighs in.
Are Consumers Cracking?
Today, we look at cracks in the story that consumers are cracking. Crack proponents expect consumers to start saving more and spending less because they’ve depleted their excess saving from the pandemic years. We expect personal saving rates to stay low and consumer spending to stay high as Baby Boomers, done with paying college tuitions and mortgage loans, spend their sizable nest eggs. (Many apparently are buying big-ticket items such as light trucks, for cash!) As long as consumers’ purchasing power keeps rising along with employment and real wages, our money is on the consumer. … While consumers remain in good financial shape, inflation has depressed consumer sentiment, particularly at the gas pump. … Dr. Ed reviews “We Were The Lucky Ones” (+ + +).
Robots, Real Estate & Energy Storage
Rockwell’s March-quarter results were surprisingly weak for a beneficiary of two broad investment themes—onshoring and automation. Customers’ excess inventories were partly to blame. Now earnings are expected to decline this fiscal year. … Also: Jackie surveys the distressed office real estate market, where financing is suffering amid higher-for-longer interest rates. But leases for high-end office space are flying off the figurative shelves as companies try to entice employees back to the office. … And in our Disruptive Technologies segment: a novel approach to storing solar and wind energy, using compressed air.
Credit, Earnings & G7 Unemployment
Today, our new Chief Markets Strategist Eric Wallerstein reviews takeaways from the Fed’s latest Senior Loan Officer Opinion Survey, for Q1. With fewer banks tightening credit and more reporting improved loan demand, there’s no sign of a credit crunch. That jibes with our no-hard-landing outlook for the economy. … Joe reports that Q1 EPS is unlikely to hit a record high, but Q2 EPS will if analysts’ current estimates are on the mark. … Also: Melissa looks at the labor market challenges faced by individual G7 countries and the various ways they’re addressing worker shortages.
Earnings Are Blooming
We don’t expect any recession this year that the Fed would have to address by easing. But since some investors think that may happen, the Fed Put is back. With it comes increased risk of a stock market meltup. For perspective, we recap the three ways that recessions typically are triggered. … When recession risk is low, as now, S&P 500 forward earnings are well correlated with actual earnings as well as with the Index of Coincident Economic Indicators. Both forward earnings and the CEI index rose to record highs last week.
Almost ‘Everything’s Coming Up Roses’
Investors in both stock and bond markets are suddenly blooming with optimism. Both markets rallied on Friday’s (mostly) positive employment report, including yet another sub-4.0% jobless rate and despite some negatives in the report. Stoking the optimism, perversely, has been economic news suggesting weakening: Cheery investors have focused not on that but on the potential ramification of it, that interest rates won’t be kept higher for longer after all. Both good and bad news are being met as great news! … One fact that indeed warrants optimism: The Fed’s 2.0% inflation target has been reached by one relevant measure. … And Dr. Ed reviews “Ripley” (+).
Copper, Semis & Nvidia’s Buying Spree
The copper price has skyrocketed in recent months, but not for the usual reason of strong global growth. Instead, Jackie reports, a perfect storm of circumstances has created an unusually tight market, with uncommon supply constraints at a time of rising demand. … Also: Semiconductor companies’ March-quarter earnings reports have shown that demand for AI chips and demand for all other types of semiconductors are on two different trajectories: The former has been soaring, the latter languishing. … And in our Disruptive Technologies segment, a look inside the acquiring mind of Nvidia.
Eurozone Recovering
The European Central Bank is widely expected to start easing in June, lowering interest rates at a measured pace to prevent a weakening of the euro. But real GDP growth in the Eurozone already resumed last quarter after two quarters of contraction. Today, we look at key economic indicators, inflation statistics, and the stock market over there, which seems reasonably valued in light of forward earnings, revenues, and profit margins. … Also: The MegaCap-8’s ytd outperformance of the S&P 500—and all of its style indexes—has been a boon to the broad index so far this year.
The Great Leaps Forward & Backward
Economic indicators aren’t always indicative of what’s happening with economies. The Index of Leading Economic Indicators continues to cry “Wolf!,” as it’s been doing for more than two years. Yet no US recession is in sight. That’s confirmed by both record-high S&P 500 forward earnings and the Index of Coincident Economic Indicators. … Robust commodities price action usually indicates a strong Chinese economy. Metals prices have rebounded briskly; yet China’s economy is very weak. The fact that oil prices haven’t concurred with the presumed message of the metals suggests something else going on.
Stagflation? Not!
One quarter does not stagflation make. True, the March quarter’s real GDP growth rate was down from the December quarter’s, while inflation was up—a combination that calls to mind “stagflation.” But the current economic scenario is nothing like the stagflationary environment of the late 1970s, when the combination of anemic GDP growth and out-of-control inflation crippled economic activity. … Today, we look at data confirming that economic activity is continuing apace—with consumers consuming, housing recovering, and businesses investing—and that PCED inflation remains on a moderating track, within our target range for the year. … Also: Dr. Ed reviews “Perfect Days” (+).
Banks, Defense & AI Creep
Two regional banks’ Q1 earnings reports highlighted the drag higher interest rates are having on results and showed that office building real estate loan defaults may be manageable. Zions and Truist managements struck some optimistic notes about the future on their earnings calls, Jackie reports. And while the S&P 500 Regional Banks industry’s fundamental metrics appear to be improving, its forward P/E remains lower than usual. … Despite rampant geopolitical strife, the S&P 500 Aerospace & Defense industry’s price index has barely risen ytd. Its diverse composition of companies explains why. … And in our Disruptive Technologies segment, five novel ways AI is being employed (would you let ChatGPT plan your wedding?).