Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
China, Europe & Earnings
Is China really growing as fast as official data show? A debt crisis seems to be underway. … Beijing Put? The stock market is so bad in China that rumors are spreading that the government will intervene. … Melissa updates our analysis of Europe’s economy, which may be in a German-led recession. The good news out of Europe is that survey data suggest that the economy isn’t getting worse, for now. … Joe has a close look at S&P 500 profit margins.
Does Valuation Matter?
The bull market started to broaden from early November through early January, but narrowed last week, probably on profit taking. No one seems to be cashing in their chips for the MegaCap-8. … A tech-led meltup could be underway. … From immaculate disinflation to irrational exuberance? …Revisiting Greenspan and the valuation question.
Let’s Party Like It’s 1999!
Now that investors’ recession fears have abated, they’re focusing on company fundamentals again, so good corporate news is having a stronger bullish impact. Additionally, investors are excited about the potential of AI and the prospect of Fed easing. The possible result: an exuberant meltup phase, which might already be under way and might become irrational. … Unless Fed Chair Powell stresses that he’s in no rush to ease, a speculative bubble could inflate, funded by money moving from interest-paying vehicles into stocks and bonds. … Also: The economy is nearly as good as it gets. Unemployment, inflation, and gas prices are down; consumer sentiment and retail sales are up. ... And: Dr Ed reviews “Boys in the Boat (+ +).
Shipping, Steel & Solar
With traffic through both the Panama and Suez canals disrupted for different reasons, shippers are shouldering higher costs to go the slow way around the tips of South America and Africa. Impacts could include supply-chain delays, inventory shortages, and inflationary pressures. Jackie reports on the reactions of shippers and companies with goods to ship. … Also: Commodities prices remain depressed by the economic malaise in China and Europe. The price declines are broad-based, although steel’s price is up y/y, reflecting strong demand from the rapid construction of US factories by companies capitalizing on government incentives. … And in our Disruptive Technologies segment: Solar innovators compete.
Seas Of Troubles
With the world awash in geopolitical strife, we’re monitoring commodity markets for signs of both inflationary shocks and a weakening global economy. … History suggests the US economic expansion may last until mid-2026. We’re watching for developments that could cut it short. … Is New York state’s nascent recession a canary in a coal mine? We’ll see soon whether more Fed districts report similar weakness in business activity. Notably, the goods sector of the broad economy has yet to enter the rolling recovery we expect. … Also: Joe provides updates on analysts’ net estimate revision activity and recent performances of Growth vs Value and Equal Weight vs Market Weight indexes.
Powell’s Inflation Nightmare
The runaway inflation of the 1970s was whipped only after Paul Volcker took over as Fed chief, doing the deed but not without precipitating a recession. Powell’s efforts to engineer “immaculate disinflation,” lowering inflation without a recession, have gone well so far, as we’ve been expecting. But the specter of 1970s inflation’s twin peaks must keep him up at nights now that Middle East hostilities raise the risk of resurgent energy inflation. … Globally, inflation has been dropping, with China’s economic woes effectively working to export deflation to the rest of the world. But war in the Middle East could jeopardize that scenario if it disrupts oil supplies. … Dr. Ed reviews “Killers of the Flower Moon” (+).
Banks, Drugs & CES
Bank stocks have been rallying, with investors shrugging off concerns about commercial real estate loans and net interest margin pressures even as bank analysts cut 2024 revenue and earnings estimates. Will big banks’ Q4 earnings reports Friday change the narrative? … Also: Several forces look poised to disrupt pharmaceutical pricing. Besides Medicare’s newly bestowed negotiation powers, Florida plans to save big bucks by importing drugs from Canada and innovative new business models cut out the middle man to lower the drug prices offered to consumers. … And: Jackie highlights intriguing new technologies unveiled at this year’s CES convention.
Here Comes Another Earnings Season
Now’s a good time to review how Q4 earnings reports may affect the forward earnings that investors focus on. While Q4 results don’t go into the forward earnings calculation, what managements report on Q4 conference calls can skew forward earnings in either direction by altering analysts’ expectations for the future. … Analysts have already shaved their collective Q4 estimates for the S&P 500 by 6% since early October. We expect their pre-season expectations to be exceeded again; Q3 results had a 4.5% upside surprise. ... Like the analysts, we remain bullish on earnings in 2024 and 2025. ... Also: Joe does a deep dive into Q4 earnings growth expectations from various perspectives.
Looking Forward
We continue to forecast real GDP growth of 2.5% this year, but improved productivity growth could boost that to 3.0% as well as help keep inflation in check. In fact, we see a revival of productivity growth over the rest of this decade that keeps labor cost inflation close to 0% as well as supports inflation-adjusted wage growth, boosting consumers’ purchasing power. In both those ways, a productivity boom can be an engine of economic growth. That’s our Roaring 2020s scenario. … Also: Recently released employment statistics that hard-landers say supports their recession outlook might actually reflect the shortage of labor, in our opinion.
The True Story About Long & Variable Lags
The point between Fed tightening and easing is a good time to reconsider the widely accepted long-and-variable-lags theory of monetary policy. Is the economy still vulnerable to recession from the lagged effects of the 2022-2023 tightening round? We don’t think so. The markets have already started to ease, which should offset some lagged tightening effects. Furthermore, lagged tightening effects don’t invariably cause recessions. Our work shows that recessions result when tightening rounds cause credit crunches, not when they merely tamp down demand, and that credit-crunch precipitated recessions descend quickly, not with lags. … Also: Recent unemployment stats support rising consumer spending, in our view. … Dr. Ed reviews “The Crown” (+ + +).
MegaCap-8, P/Es & AI
Are the MegaCap-8 stocks valued precariously high after soaring last year—is that what their Tuesday underperformance suggests? Looking at the eight stocks’ collective performance through a wider two-year lens suggests not. The group’s forward P/E stands about where it did when 2022 began, and its above-market valuation seems justified by its earnings growth outlook. … Also: Despite the S&P 500’s 2023 strength, more than two thirds of its industries’ valuations contracted. Jackie examines recent years’ P/E changes by S&P 500 industry. … And: Evidence of AI’s ability to boost productivity is rolling in, but whether it will displace workers has yet to be seen.
A Fifth Year Of Living Dangerously
Despite all the investment perils of the past four years, the S&P 500 rose nearly 50% since the decade began. At this point, investors seem carefree, which worries us. We’re monitoring four clear and present dangers that investors seem to be shrugging off: a more hawkish Fed than investors expect, paralyzing partisanship in Congress, the Middle East war, and China’s aggressive ambitions concerning Taiwan. … Also: Joe reports on Standard & Poor’s annual reclassification of companies into indexes. Now all of the MegaCap-8 stocks reside again in the Pure Growth index after seven had been ousted a year earlier.
A Dozen Reasons To Be Bearish In 2024 (Not!)
How likely is the stock market to have a down year in 2024? Since down years tend to be associated with recessions, and since a recession is unlikely now that inflation has been approaching the Fed’s target, and since the Fed looks more likely to ease than not, it’s hard to see the stock market ending 2024 lower than it began. … Our last Morning Briefing of 2023 provided a dozen reasons to be bullish in 2024. This first one of the new year provides a dozen reasons not to be bearish. ... Also: Dr. Ed reviews “Maestro” (+ +).
A Dozen Reasons To Remain Bullish In 2024
Check out the accompanying pdf and chart collection. Executive Summary: The bears who still expect a recession base their arguments on historical precedents: At times in the past when economic indicators were flashing the signs they are today, recessions occurred. But we see good reasons not to apply past rules of thumb to the current set of circumstances. Moreover, our Roaring 2020s thesis that widespread adoption of new technologies will set off a productivity boom is unfolding. As a result, we’re bullish on the outlook for the US economy and stock market. Today, we present the bears’ talking points and our rebuttals, including 12 good reasons for optimism as we enter 2024. … Also: Dr. Ed reviews “Archie” (+ +).
A Dozen Reasons To Remain Bullish In 2024
The bears who still expect a recession base their arguments on historical precedents: At times in the past when economic indicators were flashing the signs they are today, recessions occurred. But we see good reasons not to apply past rules of thumb to the current set of circumstances. Moreover, our Roaring 2020s thesis that widespread adoption of new technologies will set off a productivity boom is unfolding. As a result, we’re bullish on the outlook for the US economy and stock market. Today, we present the bears’ talking points and our rebuttals, including 12 good reasons for optimism as we enter 2024. … Also: Dr. Ed reviews “Archie” (+ +).
Drugs, China & AI
The S&P 500 sector with the brightest 2024 earnings growth outlook is none other than Health Care, with a share price index that’s a deep underperformer this year, Jackie reports. One of its component industries accounts for much of both this year’s stock price pain and next year’s projected earnings gains—pharmaceuticals. Three drug makers in particular appear bound for standout earnings next year. … Also: China’s government is not doing what it takes to overcome its formidable economic challenges. … And in today’s Disruptive Technologies segment: one tech veteran’s advice for working with AI, warts and all.
Drugs, China & AI
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500 sector with the brightest 2024 earnings growth outlook is none other than Health Care, with a share price index that’s a deep underperformer this year, Jackie reports. One of its component industries accounts for much of both this year’s stock price pain and next year’s projected earnings gains—pharmaceuticals. Three drug makers in particular appear bound for standout earnings next year. … Also: China’s government is not doing what it takes to overcome its formidable economic challenges. … And in today’s Disruptive Technologies segment: one tech veteran’s advice for working with AI, warts and all.
Earnings: Yesterday, Today & Tomorrow
Check out the accompanying pdf and chart collection. Executive Summary: S&P 500 companies collectively outperformed industry analysts’ Q3 expectations, posting record-high revenues and earnings per share. The profit margin was the highest in four quarters, suggesting that the cost-push inflation pressures that had weighed on margins are easing. … Analysts’ consensus estimates for 2024 and 2025 suggest accelerating growth for both revenues and earnings and rising profit margins. … The earnings outlook together with our projected valuation ranges result in our price targets for the S&P 500 of 4600 by the end of this year, 5400 by the end of next, and 6000 by year-end 2025.
Earnings: Yesterday, Today & Tomorrow
S&P 500 companies collectively outperformed industry analysts’ Q3 expectations, posting record-high revenues and earnings per share. The profit margin was the highest in four quarters, suggesting that the cost-push inflation pressures that had weighed on margins are easing. … Analysts’ consensus estimates for 2024 and 2025 suggest accelerating growth for both revenues and earnings and rising profit margins. … The earnings outlook together with our projected valuation ranges result in our price targets for the S&P 500 of 4600 by the end of this year, 5400 by the end of next, and 6000 by year-end 2025.
Global Economy Still In A Funk
Check out the accompanying pdf and chart collection. Executive Summary: Recent global indicators show economic growth at a crawl, commodity prices remaining weak, and inflation moderating. Weighing on the pace of growth have been recessions in China and Europe. China’s economic malaise is secular in nature and likely to last for a while given the challenges facing that country. But we expect the ECB to ease in the spring as inflation moderates, and the Eurozone’s shallow recession to lift. US economic growth has been slowing from Q3’s rapid pace, but a comeback in productivity growth could recharge it. … We continue to advise overweighting US stocks in global equity portfolios.
Global Economy Still In A Funk
Recent global indicators show economic growth at a crawl, commodity prices remaining weak, and inflation moderating. Weighing on the pace of growth have been recessions in China and Europe. China’s economic malaise is secular in nature and likely to last for a while given the challenges facing that country. But we expect the ECB to ease in the spring as inflation moderates, and the Eurozone’s shallow recession to lift. US economic growth has been slowing from Q3’s rapid pace, but a comeback in productivity growth could recharge it. … We continue to advise overweighting US stocks in global equity portfolios.
Hard Luck For Hard Landers
The economy has proven resilient, defying all the reasons it shouldn’t be, to which diehard hard landers still cling. We expect that it will remain resilient and that inflation will continue to fall to the Fed’s target (a.k.a. “immaculate disinflation”). In this scenario, the Fed won’t be rushing to ease and won’t ease by much. The Fed’s policy stance is perhaps better cast as “normalizing” than tightening that requires undoing. … Labor market supply and demand are coming into better balance, as the Fed would like, though November employment data attest to the labor market’s continued strength. … Also: What to make of the fact that GDI is weaker than GDP. … And: Dr. Ed reviews “Reptile” (+).
Hard Luck For Hard Landers
Check out the accompanying pdf and chart collection. Executive Summary: The economy has proven resilient, defying all the reasons it shouldn’t be, to which diehard hard landers still cling. We expect that it will remain resilient and that inflation will continue to fall to the Fed’s target (a.k.a. “immaculate disinflation”). In this scenario, the Fed won’t be rushing to ease and won’t ease by much. The Fed’s policy stance is perhaps better cast as “normalizing” than tightening that requires undoing. … Labor market supply and demand are coming into better balance, as the Fed would like, though November employment data attest to the labor market’s continued strength. … Also: What to make of the fact that GDI is weaker than GDP. … And: Dr. Ed reviews “Reptile” (+).
Onshoring, Acquisitions & Octopus
Federal incentives promoting the onshoring of manufacturing plants have certainly hit their mark in Arizona and New York. Both states are sprouting new regional semiconductor manufacturing ecosystems, Jackie reports, dramatically boosting local economic development. … Also: Financial firms with investment banking operations report a pickup in M&A, a trend that should only accelerate when the interest-rate environment stabilizes. … And our Disruptive Technologies focus today is on Octopus Energy, a British company with an innovative business model that rewards green electricity consumption.
Onshoring, Acquisitions & Octopus
Check out the accompanying pdf and chart collection. Executive Summary: Federal incentives promoting the onshoring of manufacturing plants have certainly hit their mark in Arizona and New York. Both states are sprouting new regional semiconductor manufacturing ecosystems, Jackie reports, dramatically boosting local economic development. … Also: Financial firms with investment banking operations report a pickup in M&A, a trend that should only accelerate when the interest-rate environment stabilizes. … And our Disruptive Technologies focus today is on Octopus Energy, a British company with an innovative business model that rewards green electricity consumption.