Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Get Ready To Short Bonds?
Last week saw unfounded US recession fears and global financial market jitters go poof as quickly as they arrived. Dr. Ed examines what the markets were overreacting to when they beat a hasty retreat and the subsequent developments that set investors straight. … Weather was the reason for much of the weakness in July’s economic indicators, suggesting that August’s data may surprise on the upside and that Fed officials might push back against expectations of numerous rate cuts ahead. We expect just one 25bps cut in September and no more for the year, especially since a greater cut could trigger another carry-trade unwind. … As for the bond market, we see three possible scenarios and lean toward the mildly bearish one. ... And Dr. Ed favorably reviews “Widow Clicquot” (+).
On Consumers & More On AI
The US consumer’s spending hasn’t declined, but it has shifted—leaving retailers of out-of-favor items out of luck. Jackie recaps what company managements have revealed about what consumers do and don’t want to buy these days and pinpoints multiple reasons for the shifts. … And: AI seems to be advancing by the minute. Our weekly Disruptive Technologies segment looks at the strides two companies have made in producing avatars and robots that seem very human.
The ABCs Of Global Commodities
While the US federal budget deficit is on an unsustainable course, there’s good news about it: Income-tax receipts are up y/y—more evidence that no recession is on the horizon. And while spending also is up y/y, the net result is a lower deficit than at this time last year. For bonds, that means the 10-year Treasury yield won’t likely retest last fall’s highs near 5.00% anytime soon. … Australia, Brazil, and Canada are big exporters of commodities; Melissa surveys the export landscape for each by commodity and trading partner. … And Joe recaps the Q2 earnings, revenues, and profit margins to date for the S&P 500 and its 11 sectors.
On Geopolitical & Credit Crises
As geopolitical tensions in the Middle East mount and Ukraine’s war with Russia intensifies oil prices may be starting to spike. So we reiterate our commodity- and equity-based hedges for these risks. On a happier note, Ed reviews our Credit Crisis Cycle theory for how monetary policy induces a recession... and why we don't see one currently. Eric also reviews the latest consumer credit data, explaining why household balance sheets look better than before the pandemic despite alarms sounding on credit card delinquencies.
No Recession In Earnings Or In Disinverting Yield Curve
Corporate earnings have never been higher, suggesting that employment should continue to grow as profitable companies expand their payrolls. Today, Ed and Eric put the prospect of a recession into perspective with their “Credit Crisis Cycle.” Ed notes that S&P 500 companies’ record-high forward earnings is a bullish indicator for the stock price index. The S&P 500 forward profit margin is near its record high and expected to hit new highs in the productivity growth boom we project, our Roaring 2020s scenario. … Eric explains why this time, a disinverting yield curve is not signaling an imminent recession as it has in the past. Other relied upon recession indicators are flashing false signals as well. … Dr. Ed favorably reviews “Pachinko” (+ + +).
Semis, Rails & Robots
Not all semiconductor manufacturers are faring as well as the stats of the S&P 500 Semiconductors industry suggest, Jackie tells us. Many are experiencing a punishing inventory correction, particularly those that sell semis used in cars, PCs, cell phones, and industrial products. The good news is that inventories should be back to normal in a few more quarters, and share prices soon should reflect that. … Also: After a tough 2023, the railroad industry should return to growth this year; several growth engines are expected to help CSX gather steam. … In our Disruptive Technologies segment, a look at China’s robotic ambitions and the concern they’re raising on Capitol Hill.
Giving Private Credit Some Credit
Those who’ve long insisted that the US economy is headed into a recession have been citing the opinions of bank loan officers surveyed by the Fed. The latest such survey, however, suggests banks don’t expect a recession. Eric recaps the just released survey’s takeaways and points out that banks aren’t the go-to source of capital for businesses that they once were anyway. … Instead, reports Melissa, companies increasingly are turning to the booming private capital market. She explains what makes it tick. … Also: Joe gives us an update on Q2 reporting season. Results so far have been mixed—underwhelming for the Magnificent-7, better for the “S&P 493.”
The Almost Everything Global Panic Selloff
We’ve been making the case against a hard landing of the economy, as recessions invariably result from financial system crises and the credit crunches they cause. Could the unwind of the yen carry trade and the subsequent global rout in financial markets precipitate such a crisis? We don’t think so, but are closely monitoring credit conditions on both sides of the Pacific. How will the Fed respond? We’re sticking with our one-and-done rate-cut forecast for this year. How much longer will the stock-market pain continue? The bleeding could stop this week.
Rolling Into A Recession?
A weak July employment report does not a recession make. The financial markets reacted on Friday as though it does, but we believe that report was a weather-impacted anomaly and not representative of the strength of the US labor market. Eric & Ed make that case today, explaining what was going on behind the scenes to make Friday’s stock market unusually volatile, why we expect employment data to snap back in August, and why we don’t expect a hard landing of the economy. … Furthermore, the latest productivity data are consistent with our Roaring 2020s outlook. ... Also: Dr. Ed reviews “Presumed Innocent” (-).
China, Tech & Solar Panels
Collateral damage from China’s ailing real estate sector has hit its consumer sector. US companies with exposure to China’s consumers have felt the blow of depressed consumer sentiment and spending. Jackie shares her takeaways from some of the victims’ June-quarter earnings reports. … Is the MegaCap-8 stocks’ recent selloff a canary in a coal mine, warning that AI won’t live up to its hype? Nope, suggests a look at their valuations together with their earnings growth prospects. … Also: Our Disruptive Technologies segment focuses on prospects for solar panel manufacturers and some innovations they’re developing.
US Resilience, Eurozone Weakness& More On Earnings
Why hasn’t the Fed’s tightening of monetary policy slammed the brakes on the US economy? Eric explains the structural economic shifts that have led to increased rate insensitivity as well as the implications for setting the federal funds rate going forward. … The Eurozone economy seems to have long Covid: Melissa reports that it been struggling to regain its pre-pandemic pace of growth. The European Central bank is tasked with a balancing act, both stoking growth and dampening inflation. … Germany’s leadership is floundering, and its economic indicators are pointing south. … Also: Joe reports that the investment-style rotation away from large caps has healthy earnings support.
YRI’s Earnings Tweaks & Dudley’s About-Face
We’re updating our S&P 500 price targets for this year and the rest of the decade. Near term, we see the index continuing to churn below its July 16 record high through election time; it seems to have support around 5450, its 50-day moving average, which we don’t think will be breached given companies’ earnings strength. A strong rally at year-end might sweep the index to a new record high around our (newly raised) 5800 target. Dr. Ed shows the math that yields this and our subsequent years’ price targets. … Also: Eric counters NY Fed President Dudley’s recent op-ed argument for easing sooner than September.
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” (+ + +)