Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Jobs, Earnings& Sweden
The widespread expectation that the Fed will lower interest rates this year is linked to the widespread expectation that the labor market will weaken. Both may be misguided. If the economy remains resilient and the labor market strong, as the latest data suggest, there’s little reason for the Fed to ease monetary policy in 2024. … Analyzing the data on industry analysts’ Q1 EPS estimate revisions and growth expectations for S&P 500 companies suggests to Joe that investors will be treated to another strong quarter. … Also: Melissa journeys to Sweden for a look at the country’s rebounding economy and sensibly valued equity market.
‘Nothing To Fear But Nothing To Fear (And Iran)’
The unforeseen pandemic briefly derailed our “Roaring 2020s” outlook early this decade. The one big potential risk to it that we had identified back in 2020 is a war between Israel and Iran that disrupts oil markets and causes oil prices to surge. The risk of that scenario is rising. It could re-escalate inflation, recalling the 1970s, and nix any chance of the Fed cutting interest rates this year. … Like the widely expected recession that never arrived last year, might monetary easing be a no-show this year? … Higher oil prices in recent days are already making bond and stock markets jittery.
The Amazing Flying Machine
The US economy is flying high and should continue to do so. It has defied the past two years’ widespread expectations that it would land hard or fall into recession. In fact, last year’s real GDP growth of 3.1% matched the 48-year average. Fiscal stimulus has helped, but the major engine has been robust consumer spending as Baby Boomers spend their wealth. With consumption per household near its record high, Americans have never been better off. … Corporate America is thriving too, with record cash flow, capital spending, and profits. … Plus, inflation by some measures is at the Fed’s 2% target. … Also: Dr. Ed reviews “Bob Marley: One Love” (+ +).
Housing, Drug Stores & IPOs
If the market for existing homes revs up as mortgage rates drop, will homebuilders be able to clear their excess inventories? Investors don’t seem worried, Jackie notes. … Also: The sole constituent of the S&P 500 Drug Retail industry, Walgreen Boots Alliance, has been through the wringer: booted from the DJIA, abandoned by its former CEO, and stripped of its investment-grade debt rating. But with a forward P/E battered to just 6, might all the misfortune be priced into the stock? ... And: With the IPO market moribund, private equity firms—and their investors—are caught in a logjam of immobile assets.
Central Banks & Profit Margins
Melissa reviews the challenges facing the central banks of Japan, China, and the Eurozone as they eye—or make—monetary policy moves. The BOJ is finally unwinding its extreme monetary ease (no more sub-zero interest rates!). The PBOC is easing in yet another attempt to revive its economy (good luck with that). And the ECB might ease its restrictive stance in June, if inflation and labor data warrant. … Joe reviews the latest trends in S&P 500 forward earnings, forward revenues—both at record highs—and the implied forward profit margin, at a 17-month high. He also shares which sectors are in profit recoveries and slumps.
More On The Return Of The Fed Put
Reading between the lines of Fed Chair Powell’s recent press conference, he seems to be reassuring financial markets that the Fed has their backs. We see that in his emphasis that labor market weakness—should it unexpectedly arise—could warrant monetary easing; inflation isn’t the only economic variable that could do so. His repeated mention of unexpected labor market weakness that would require a policy response, even while characterizing the labor market as robust with no sign of such weakness, seems to us code for: “The Fed Put Is Back.”
Another Post On Our Post-Modern Monetary Theory
Is the “Fed Put” back? Might the Fed’s assurances that interest rates will be brought down this year (as long as inflation behaves as expected) fuel irrational exuberance among investors? And what if interest rates really don’t need to come down, because the notion that they do rests on a faulty premise—the “long and variable lag” thesis? Our Post-Modern Monetary Theory suggests that monetary tightening doesn’t cause recessions because of a lagged demand-choking response of the economy. Tightening usually causes recessions when it triggers financial crises that turn into credit crunches that bring on recessions. That sequence of events is unlikely now that the Fed knows how to play Whac-A-Mole in the financial markets. … Also: Dr. Ed reviews “Masters of the Air” (+ + +).
China & South Korea
China’s economic woes are having a disinflationary domino effect on the economies of its major trading partners; the US is a case in point. The heightened trade tensions that might result could prompt those trading partners to raise tariffs on Chinese imports … Also: Melissa examines South Korea’s economy, equities market, and real estate market. None are thriving. South Korea has the world’s lowest birthrate, a shrinking population, and more than a third of seniors living in poverty; yet immigration is discouraged. But the country may be teaming up with Japan and India in a mutually beneficial alliance.
Nvidia, Refiners & Robots
With excitement over Nvidia’s AI-enabling offerings never greater than after its GTC conference this week, Jackie offers a timely word of caution: Nvidia investors would do well to keep an eye out for the peaking of the company’s forward revenues and earnings. If Nvidia’s stock follows the pattern of Cisco’s circa 2000, the shares may peak about two months after revenues and earnings do. … Also: The recent outperformance of the S&P 500 Oil & Gas Refining & Marketing index likely reflects a jump in the crack spread suggesting that refineries may outearn analysts’ expectations. … And: Meet the most humanoid robot yet, from Figure AI.
Mixed Emotions
Confidence measures among both consumers and small business owners are depressed, somewhat counterintuitively given the strength of the economy. Depressed sentiment doesn’t typically cause recessions, and the Fed has plenty of room to ease, nipping in the bud any problem it does present. A recession isn’t even in our forecast. Still, it’s worth examining why consumers and small business owners are so glum. … Consumers are troubled by the increase in prices since the start of the pandemic, though wages have mostly kept up with prices. … Small business owners may be depressed by flattish revenues and earnings growth. Their hiring is slowing along with quits.
Post-Modern Monetary Theory
Unlike in January, investors’ rate-cut expectations now appear to be in sync with FOMC members’ projections. Both seem to be anticipating two or three 25-basis-point cuts over the coming months. … Whether the apolitical Fed might time its rate cuts with any consideration for election-year politics is unclear, but we list some political considerations that it might be weighing if so. … Also: We explain the theoretical framework we use to forecast the economy. For lots of reasons, we are not proponents of Friedman’s Monetarism or Kelton’s Modern Monetary Theory, favoring instead what we call “Post-Modern Monetary Theory.”
Cisco Vs Nvidia & AI Goes To School
A quarter century ago, people saw Cisco as a way to invest in the enormous potential of the Internet. Investors bid up its shares, and purchasing managers over-ordered its products, expecting rationing since supplies were tight. What happened next wasn’t pretty. Today, people see in Nvidia—its shares and its products—the enormous promise of AI. Jackie examines whether Cisco circa 2000 represents a cautionary tale for Nvidia investors today. … Also: In our Disruptive Technologies segment, a look at the many ways AI can improve classroom learning materials, engage students, and make teachers’ lives easier.
CPI, Earnings & Taiwan
Inflation is well under control, in our opinion, as February’s CPI—excluding the anomalous shelter component—is right around the Fed’s 2% y/y target. But with retail sales suggesting strong consumer spending, the Fed needn’t rush to ease. … Also: With nearly all of the S&P 500 companies’ Q4 earnings reports now in hand, Joe observes that their collective revenues per share rose to a record high—impressive considering inflation’s decline. But the collective profit margin fell from its Q3 level, causing a q/q earnings-per-share shortfall. Four sectors contributed to the margin weakness. … And: Melissa reviews Taiwan’s economy and stock market, which have been strong notwithstanding China’s saber rattling.
As The World Churns
The US economy is outperforming most other countries, keeping the dollar strong. The global economic weakness has depressed the prices of commodities, especially oil, and helped moderate inflation. But globalization is alive and well: Export volumes are stalled, though in record-high territory. Manufacturing is recovering in most major economies and strongest in emerging ones. Most central banks are eyeing their easing options; Japan is the exception, eyeing tightening. … We think the US labor market remained strong enough last month to have boosted consumer spending. … Also: A brief world tour, visiting the economies of Germany, Japan, and China.
‘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.