Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
‘Pent-Up Exuberance’
Is Bostic on to something? We think the Atlanta Fed president is right to warn about “pent-up exuberance,” the business community’s readiness to pounce on opportunities en masse the minute interest rates drop. Demand then could surge, triggering resurgent inflation. The Fed should be wary of tripping that wire by lowering interest rates too soon. … Yet Fed Chair Powell sounded ready to ease soon last Thursday. We don’t think the recession threat (of keeping rates higher for longer) is as worrisome as the pent-up exuberance threat (of easing too soon). … Our Roaring 2020s scenario is right on track. Fingers crossed the Fed doesn’t mess with success. … Dr. Ed reviews “American Fiction” (+ + +).
Inventories, China & Norway’s EV Roadtrip
If Target’s recent quarterly earnings report is indicative, retailers have reached the light at the end of the excessive-inventory tunnel. Jackie shares what Target management had to say about the benefits of appropriate inventory levels now that they’ve been restored as well as other evidence that retail’s inventory correction is probably over. … Also: China is targeting 5% economic growth but has scant hope of achieving it without a massive debt restructuring in its imploded real estate sector. … And in our Disruptive Technologies segment, why Norwegians love their electric vehicles.
Oil, Brazil & Earnings
OPEC + is extending its oil production cuts in an effort to support oil prices amid sluggish global economic growth and rising oil output from outside the cartel. Today, we look at world oil demand and supplies. … Also: Brazil’s MSCI stock index has been treading water since mid-2021. Melissa examines what might be impeding Brazilian stocks’ performance, including factors unique to the country’s economic, business, and political environments. … And: Joe updates us on industry analysts’ earnings and revenues revisions activity for S&P 500 companies during February.
Around The World: Muddling & Chugging Along
Some of the major economies of the world are in recessions or nearly so, but the global economy is holding up thanks to the strong US economy. Perversely, several global stock markets are at record highs, with both the All Country World (ACW) MSCI and even the ACW ex-US MSCI at record highs. Today, we look at which developed and emerging countries’ stock indexes are participating in the strength and which countries are experiencing the manufacturing growth to support strong stock markets. … Also: A brief assessment of the economies of the US, China, and Japan vis-à-vis their recent stock market vitality.
The Elephant (& The Donkey) In The Room
Bouts of geopolitical or domestic political strife usually don’t derail the US stock market. Investors tend to divorce politics from their decision making, counting on wars to end and gridlock to keep regulation-happy lawmakers in check. Only when geopolitical problems disrupt supply chains, trade, and global energy markets or when domestic partisanship prevents the government from functioning do these considerations matter to companies and their investors. We’re closely monitoring these risks and think it’s time for a heads-up: They could cloud our optimistic Roaring 2020s outlook in 2025. … For now, no such concerns are impeding the bull market; it’s currently thriving by multiple measures. ... Also: Dr. Ed reviews “Rogue Heroes” (+ +).
Materials, Earnings & Nvidia’s AI
Looking at the S&P 500’s ytd performance by sector can be deceptive. You’d never guess that one underperforming sector, Materials, is home to three industries among the S&P 500’s top performing. Also not apparent is the breadth of industry participation in this year’s market strength. Only four of the S&P 500’s 20 top performing industries are tech related. Jackie examines why the ytd winners have been doing so well. … Also: She looks at the projected earnings growth of various sectors and industries this year and next. … And: What Nvidia execs had to say last week about the AI wave they’re riding—which appears to be far from over.
Another Happy-Go-Lucky Earnings Season
When there’s no recession on the horizon, earnings reporting seasons invariably pleasantly surprise as actual results top analysts’ consensus expectations. This earnings season is no exception. Today, we look at the impacts that S&P 500 companies’ December-quarter results are having on estimates for the years ahead, both the analysts’ and our own. … Also: With the Q4 results of most S&P 500 companies now in hand, Joe compares the aggregate data—including revenues and earnings surprise data, y/y growth, and profit margins—with Q3 results, finding most measures improved. He also isolates the effects of the MegaCap-8 and Energy sector companies’ Q4 results on those of the overall S&P 500.
Is The Global Economy In A Recession?
A few major economies of the world are in recessions currently, but the global economy as a whole is not—thanks mostly to the strong US economy holding it aloft. China is in a recession for reasons we’ve covered often in the past. Today, Melissa summarizes the major challenges facing the UK, Germany, and Japan. Notably, the UK and Japan have sunk into technical recessions with two consecutive quarters of real GDP contraction, while Germany has logged one quarter of contraction after one of no change. Aging populations present structural hurdles for all of these struggling economies.
The Roaring 1990s: Déjà Vu All Over Again?
Many of this decade’s economic and financial market trends bear a striking resemblance to those of the 1990s. That was a decade in which a stock market meltup preceded a meltdown (in the early 2000s), so monitoring meltup indicators today is well worthwhile. Now, as then, stock market strength is translating to significant wealth effects that should keep the economy resilient and monetary policy restrictive for longer. Today, we highlight the two periods’ similar economic conditions (comparing the trajectories of real GDP growth, productivity growth, inflation, unemployment, and the federal funds rate) and financial market paths (bond yields, the stock market). … Also: Dr. Ed reviews “The Zone of Interest” (+ + +).
Consumers, Tech Infusions & AI
With good incomes and debt that isn’t growing faster than incomes, consumers have been spending apace over the past quarter, but selectively. Jackie shares insights into what they’ve been buying and passing up, gleaned from the quarterly conference calls of two retail giants, Walmart and Home Depot. … Also: Changes to the composition of two Dow Jones indexes—the DJIA and DJTA—bring more technology exposure via Amazon and Uber. Exposure to high-flying tech stocks has given an outsized boost to the performance of several S&P 500 sectors’ indexes lately. ... And in our Disruptive Technologies segment: How WPP uses AI to optimize its advertising and marketing services.
AI Isn’t Intelligent
The AI gold rush supports our Roaring 2020s scenario. However, while AI sounds intelligent, it isn’t. As its more credible disinformation spreads across the Internet, it’s bound to cause trouble. Fingers crossed that its creators smarten it up. … Nvidia has cornered the market on the GPU chips that enable AI—and has the earnings and share price gains to show for it (shades of Cisco during the Tech Wreck?). … How the current tech-stock boom differs from the Tech Wreck period. … Also: Joe shares takeaways from the Q4 earnings reported by S&P 500 companies so far. The results are better than Q3’s by various measures, and Nvidia’s earnings are bound to move the needle positively.
Earnings Bullseye, More Bullish Targets & More On Meltups
Today, we analyze the analysts, noting that they tend be influenced by stock market meltups—thus fueling the meltups—and during meltups tend to raise their long-term earnings growth rates unrealistically high. Nevertheless, we explain why we follow their forward earnings, revenues, and profit margin projections closely. We also give our projections for the S&P 500 companies’ operating earnings, revenues, profit margins, as well as the index’s the forward P/E and our S&P 500 price targets now through 2026, when we expect the S&P 500 price index to reach 6500. … Also: Dr. Ed reviews “Napoleon” (- -).
Transports, Travel & Uber
Shipping industry pricing dynamics have been disrupted by hostilities in the Red Sea and drought in the Panama Canal, with both problems requiring the rerouting of ships. Jackie examines the pricing outlook as new ships enter the market and whether the shipping industry’s pain might be the trucking and rail industries’ gain. … Also: A look behind several transportation and logistics-related industries’ stock price indexes. The inclusion of Uber has helped drive the S&P 500 Transportation Composite higher, but not so the Dow Jones Transports, which doesn’t include the ride-sharing company. Both the Dow Jones Transports and the S&P Air Freight & Logistics industries include UPS and FedEx, recent underperformers up against an amazonian competitive foe.
CPI, Earnings & Mexico
We don’t expect the Fed to start easing anytime soon. We base that on Powell’s recent comments, January’s CPI report—which was higher than expected but no cause for concern—and the fact that it’s not necessary to ease now to avert a recession, as the Fed’s critics believe. … Also: Joe shares takeaways from the S&P 500 companies’ Q4 results reported so far. Notably, all 11 S&P 500 sectors have exceeded analysts’ consensus expectations. … And: Melissa takes us to Mexico, where the economy is benefiting from increasing trade with the US and the stock market is undervalued by historical measures.
Year of the Dragon
China’s stock market—and its economy—could use some of the fire power evidenced in the US stock market. The Chinese government’s efforts to prop up the economy and stock market have met with mixed results. But in the US, the bull market in stocks has been self-perpetuating, attracting more money into equities as it continues.
Why Were Economists So Wrong?
High inflation rarely has been tamed without precipitating a recession. Few economic prognosticators thought it could be done. Yet the Fed has steered inflation down toward its 2.0% target while allowing the US economy to fly, avoiding a hard landing. Today, we look at the projections of economists who expected a hard landing of the economy and why their trusty models and indicators failed them. ... Also: Dr. Ed reviews “Griselda” (+ + +).
China, Small Caps & AI
China’s economic malaise has impacted the bottom lines of US-based multinational companies that do business there. Jackie sums up the effects reported and expected for the rest of the year by two such companies, Air Products & Chemicals and Estée Lauder. The former’s top brass appears more pessimistic on the outlook for China than the latter’s. … Also: Large-capitalization stocks have outperformed their smaller-cap peers since October 2022. Chalk up the divergence to their respective sector exposures. … And in our Disruptive Technologies spotlight this week: building the better AI. Competitors Alphabet, Meta, and Microsoft vie for AI offering superiority.
A Global Perspective
Contrary to the signals of many an economic forecasting model and indicator last year, no hard or soft landing of the US economy materialized. The models misfired because they lack a global perspective to account for the impacts on the US economy of global phenomena like the Covid-19 pandemic. Today, we take the pulse of the global economy, which we expect to improve this year as central banks around the world start easing. Global manufacturing and service business activity are already on the upswing. … Also: Joe provides a mid-reporting-season update on the S&P 500 companies’ earnings, revenue, and margin results so far, with and without the MegaCap-8 companies.
US Purchasing Managers; India’s Economic & Financial Outlook
ISM’s purchasing managers surveys suggest that the manufacturing segment of the economy may be recovering from its rolling recession over the past two years. The stronger services sector continues to do well. Today, we break down which industries’ purchasing managers are represented by the M-PMI and which by the NM-PMI. … Also: Melissa takes us to India, where the stock market is strong and the economy is growing apace as India establishes itself as a global supply hub. But with the India MSCI valued at high levels both historically and relative to other emerging markets’ stock price indexes, bonds may be the best way investors can participate in India’s growth story.
Productivity Is Roaring Back
The pandemic distorted the economy in many ways, including derailing the productivity boom that we’d been expecting would characterize this decade—our Roaring 2020s scenario. That boom now may be back on track; productivity growth was well above the historical average during the past three quarters. If so, the ramifications for economic growth would be profound, as GDP growth is a function of labor force growth plus productivity growth. … We track the impact of productivity growth by monitoring inflation-adjusted wages, unemployment, unit labor costs, and price inflation rates. … Also: Productivity seems to be on the mind of Fed Chair Powell. … And: Dr. Ed reviews “Priscilla” (+).
AI, China &Energy Storage
Microsoft’s recent quarterly earnings call was a testament to the power of AI—its power to boost productivity dramatically in a host of business functions and its power to boost Microsoft’s revenues. … Also: China’s property market crisis continues to drag on. Jackie reports on how Chinese authorities are responding and the fallout on China’s housing and equities markets. … And in our Disruptive Technologies segment, a look at innovative energy storage solutions to overcome the intermittency problem of solar and wind sources.
All About Earnings
More record highs for S&P 500 companies’ revenues and earnings are projected for this year, by industry analysts and us. The estimates suggest a profit margin approaching 13%. Applying a prospective P/E of 20 to our earnings projections results in our S&P 500 price index targets of 5400 by year-end 2024 and 6000 by year-end 2025. … Just eight stocks account for more than one-fourth of the S&P 500’s capitalization; our forecasts assume that the MegaCap-8 will continue to inflate the index’s earnings, revenues, profit margin, and valuation. … Also: While analysts’ estimate revision activity remains negative, cutting more estimates than they’re boosting, Joe reports that the rate of decline is slowing.
The Wild Bunch
Fed Chair Powell has managed to subdue inflation without triggering a recession but isn’t out of the woods yet. While we await Wednesday to see what he does and says next, we examine past decades’ scenarios that he must have in mind. … In Europe, it’s unlikely that the ECB will do much monetarily to revive lackluster economic growth anytime soon; the focus is on fiscal measures. … In China, equity investors cheered the PBOC’s decision to cut banks’ reserve rate, but we view the move as a lame attempt to revive GDP growth, with more easing unlikely to follow. … In Japan, the BOJ is preparing to unwind its extreme monetary easing.
Fairy Tales Can Come True
It doesn’t take a recession to bring down inflation to the Fed’s target! “Immaculate disinflation,” widely dismissed as a fairy tale, has come true. In fact, the current economic picture is enchanting, with GDP growth remaining robust, inflation moderating, unemployment remaining low, and consumer spending holding up even as pandemic-era saving depletes. The fairy dust that’s enabled this ideal economy: productivity growth, three quarters strong and counting. … Fed Chair Powell now faces the high-stakes decision of when to lower the federal funds rate. Too soon risks stimulating asset bubbles. Too late risks overly restrictive real interest rates now that inflation is down. ... Dr. Ed reviews “Leave the World Behind” (-).
Defense, Semis & Solar
Demand for military goods is up, but that only benefits contractors if they can keep costs in check and produce defect-free goods. A look at earnings from RTX, Textron and others. … The semiconductor industry’s shares have started 2024 with a bang, but some areas within the industry are doing better than others. … Renewable energy is making inroads around the world as it has become competitive with fossil fuels, Jackie reports citing IEA data. In particular, falling solar equipment prices have helped the sunniest power source become the fastest growing renewable option.