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