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