Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Consumer Spending, China & Robots
Check out the accompanying pdf and chart collection. Executive Summary: Is the consumer spending pendulum swinging back to bingeing on goods from splurging on services? Jackie sees a few nascent signs pointing to that possibility. … Also: The Chinese government has been trying to pull China’s economy up by its bootstraps with new infrastructure projects, but critics say the initiatives are too small to make much difference. Property developers remain distressed, and economic activity is likely to remain anemic. … And: In our Disruptive Technologies spotlight are humanoid robots. We look at how they’re being deployed today and what they may be used for in the future.
Earnings Here & There
Check out the accompanying pdf and chart collection. Executive Summary: The global economy is still growing despite geopolitical and monetary policy headwinds, though the pace of growth is slow, which October’s global PMI data confirm. … Looking at stock market data globally, we find strong forward revenues, earnings, and profit margin data for the All Country World MSCI, mostly attributable to the US MSCI; the data for Emerging Markets MSCI aren’t as strong. … In the US, record-high weekly forward revenues and forward earnings suggest the same for Q3’s results. … Also: Joe reports that analysts’ estimate revisions reflect equal numbers of rising and falling estimates.
Global Economy Turning Up?
Check out the accompanying pdf and chart collection. Executive Summary: The global economic outlook remains positive, though lackluster. The IMF forecasts 2.9% real GDP growth for the world economy next year versus a projected 3.0% this year and 3.5% in 2022, and the global economic indicators we track likewise suggest slow growth. … On the downside, global GDP growth has been less buoyed by US consumers since their mid-2021 pivot from splurging on goods to bingeing on services. Also weighing on global economic activity have been the slow growth of China’s economy, hamstrung by its property sector, and Europe’s economy, beset with poor sentiment, high inflation, and depressed lending and retail sales.
‘Dangerous Times’
Check out the accompanying pdf and chart collection. Executive Summary: The Middle East crisis seems to be escalating into a regional war with US involvement, existential stakes, and global effects. The S&P 500 fell to its 200-day moving average on Friday in response to the geopolitical risks. We expect it to breach that level this week even if the bond yield declines. The escalation of hostilities we expect prompts us to raise our odds of a US recession before year-end 2024 again, now to 35% from 30%. A year-end rally is less likely now, but geopolitical crises do tend to present long-term buying opportunities in stocks. … Also: We update the bond market’s supply/demand situation, discuss the consumer-spending-employment spiral, and review the movie “Past Lives” (+).
Bank Earnings, CO2 & The Oceans
Check out the accompanying pdf and chart collection. Executive Summary: Three big banks have produced Q3 earnings surprises, beating consensus expectations and allaying fears about nonperforming real estate loans, declining deposits, and the pace of consumer spending. Jackie summarizes the key takeaways from the conference calls of JPMorgan, Bank of America, and PNC Financial Services, including what proposed Basel III Endgame regulations might mean for each. … And in our Disruptive Technologies segment: The ocean may hold the key to slowing climate change. Researchers in startups and academia are finding ways to ramp up the ocean’s CO2 absorption capacity.
Rolling Recovery
Check out the accompanying pdf and chart collection. Executive Summary: The rolling recession that struck goods producers and distributors in early 2021 has ended, and the goods sector is now enjoying a rolling recovery, as stronger-than-expected retail sales and industrial production data attest. Consumers are shopping with gusto and increasingly on stuff; they’re not about to retrench as some hard-landers expect. … Likewise emerging from a recession are S&P 500 companies’ earnings, which may have hit a record high in Q3 along with their revenues. … And: Joe compares how various style indexes have performed since the S&P 500’s July 31 bottom as well as reviews the aggregate S&P 500 earnings data from early reporters and checks in on the MegaCap-8.
It’s Different This Time
Check out the accompanying pdf and chart collection. Executive Summary: Today, we compare the current economic and financial environment with those of three past periods—the late 1970s, early 2000s, and mid-2000s. Today’s environment resembles the other three in that easy credit conditions fueled price and/or asset inflation, which led to tightening of credit conditions. In the past periods, that set off economywide credit crunches and recessions that moderated inflation. This time is different: No economywide recession is forthcoming, yet inflation is moderating anyway. The most important difference about this period, however, is that productivity growth is unlikely to collapse but to boom throughout the rest of this decade.
All About Inflation
Check out the accompanying pdf and chart collection. Executive Summary: To answer whether the latest bout of inflation in general will prove persistent or transitory, we must look deeper than the headline rate. Core rates exclude energy and food, but shelter arguably should be excluded to get the answer, as it too is still distorted by temporary pandemic-related factors. The resounding message we hear from September’s CPI data: Both headline and core CPI rates—ex shelter—were 2.0% y/y in September. That’s the Fed’s target rate (albeit for the PCED). For us, that’s confirmation enough that inflation is moderating. It’s transitory, not persistent. Then again, some will see signs of persistent inflation in the data details. ... And: Dr. Ed reviews “Somewhere in Queens” (+).
Banks, Biotech & Digital Money
Check out the accompanying pdf and chart collection. Executive Summary: Bank stocks have tanked this ytd, and analysts are pessimistic on earnings prospects. Valuations are so depressed that both the S&P 500 Regional Banks and S&P 500 Diversified Banks industry indexes sport forward P/Es below 10. But Jackie sees signs that Q3 earnings may not be as bad as feared, including a recent pickup in capital markets activity and adequate protections against slowly rising loan losses. … Also underperforming this year has been the S&P 500 Biotech industry. But brisk M&A activity may underpin these stocks. … And: China has rolled out a digital currency; the government has been incenting its uptake in numerous ways.
Bonds & Stocks
Check out the accompanying pdf and chart collection. Executive Summary: Fitch’s downgrade of US debt on August 1 was triggering for both the bond and stock markets. Bond yields since have soared, while S&P 500 companies’ collective valuation has staggered. Today, we examine the underlying issues that have kept yields elevated and the question of whether they’ve now risen high enough to attract sufficient demand to clear supply. … And: Joe shares stats on the MegaCap-8’s valuation declines since the end of July. Notwithstanding their valuation hits, these eight stocks now represent a slightly bigger slice of the S&P 500’s market cap, at a record-high 27.4%, than they did in July.
Reassessing Recession Risk
Check out the accompanying pdf and chart collection. Executive Summary: The prospects of a prolonged war in the Middle East heighten the chance of a recession in the US. That’s not our base-case outlook, but we are raising the odds we see of a recession before year-end 2024 to 30% from 25%. The other 70% represents the rolling recessions/recoveries scenario we expect to continue; it’s tough to envision a recession when consumers have the support of such a robust labor market. … But our worry list has expanded with the recent addition of a potential debt crisis and now the escalation of Middle East hostilities. Additionally, we’re monitoring the banking industry for any sign of an emergent credit crunch.
Consumers: Hotter For Longer
Check out the accompanying pdf and chart collection. Executive Summary: Today, we challenge another aspect of the hard landers’ narrative: the notion that consumers will retrench, leading the broad economy into a recession. True, many consumers must resume paying the student-debt piper soon, and many have depleted their excess pandemic saving. … But bigger forces are supporting consumer spending: Consumers simply don’t halt the spending they love to do when their incomes are secure and growing, as now, with wages rising and plenty of jobs to go around. And it’s retired Baby Boomers’ time to kick back and spend their ample nest eggs. … Also: Dr. Ed reviews “The Sixth Commandment” (+ +).
Copper, Travel & AI
Check out the accompanying pdf and chart collection. Executive Summary: Investors worried about US inflation might want to take a look at copper prices, which have fallen ytd. Copper faces gleaming long-term fundamentals, with global demand poised to soar as the EV and other electrification markets take off. But the commodity’s recent price action has been dulled by investors’ economic pessimism. … Also: Jackie examines what’s been grounding the stock price indexes of most travel-related industries. … And: AI’s transformative reach extends way beyond OpenAI and Bard. A look at some startups’ popular AI offerings.
The Debt Crisis Scenario
Check out the accompanying pdf and chart collection. Executive Summary: Are we headed for a debt crisis? Demand for Treasury bonds has fallen in the wake of Fitch’s federal debt downgrade at a time when supply has been escalating. Rising yields in response may clear the Treasury market but also reduce both demand for and supply of the private sector’s credit. A credit crunch and recession could ensue, possibly setting off a deflationary debt default spiral. … But that worst-case scenario isn’t inevitable. The Treasury bond yield may not soar above 5.00%, as increasingly feared, given our expectations for “immaculate disinflation” (i.e., without an economy-wide recession) and slowing real GDP growth. … Also: Joe’s analysis suggests the S&P 500’s Q3 earnings may hit a record high.
The Bond Vigilantes Are On The March
Check out the accompanying pdf and chart collection. Executive Summary: What moves the bond market has changed recently and disconcertingly. The 10-year Treasury bond yield’s recent action—and nonreaction to economic news that typically moves it—suggest a shift in bond investors’ focus from what monetary policymakers may do to rising alarm about what fiscal policymakers are doing. The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market; that worry has been the Bond Vigilantes’ entrance cue. Now the Wild Bunch seems to have taken full control of the Treasury market; we’re watching to see if the high-yield market is next. We are still counting on moderating inflation to stop the beatings in the bond market.
Some Good News & Not So
Check out the accompanying pdf and chart collection. Executive Summary: Last week’s plentiful economic news netted out to support our optimistic economic outlook through next year, bringing more signs of improving productivity, surging investment in manufacturing, and manageable inventories. Last week also brought some mixed news and some outright bad news, but we still see a 75% chance of a soft-landing scenario with disinflation and a 25% chance of a hard landing. Longer term, we’re still convinced that improving productivity will set the stage for a “Roaring 2020s” decade. Nevertheless, for the here and now, we are worrying quite a bit about the Bond Vigilantes’ hostile response to profligate fiscal policy. ... And: Dr. Ed reviews “A Good Person” (+ +).
Semis, Earnings & Musk’s Robot
Check out the accompanying pdf and chart collection. Executive Summary: A new trend among big tech companies: DIY AI. Amazon, Google, Tesla, Meta, and Microsoft are developing AI chips in house rather than paying up for Nvidia’s products. … Also: Analysts expect much improved earnings growth for S&P 500 companies on the whole next year, but some industries with the strongest projected growth also have stock price indexes in the doghouse this year to date. Jackie points out which. … And: Inside the neural networks of Elon Musk.
Consumers, Earnings & MegaCap-8
Check out the accompanying pdf and chart collection. Executive Summary: The US economy has been doing well thanks to consumers, defying the gravitational pull of aggressive Fed tightening. Driving the consumers’ record-high real spending is rising real disposable income. Rising real incomes are a function of strong employment. … Supporting the hot labor market are robust construction activity, consumer spending trends, and Baby Boomers’ lifestyles in retirement. … Also: Joe examines the rates of Q3 earnings and revenues growth that analysts expect for the S&P 500 with and without two sets of stocks that sway results significantly: the MegaCap-8 and the S&P 500 Energy sector.
Is Powell’s Path Forward Widening Or Narrowing?
Check out the accompanying pdf and chart collection. Executive Summary: The Fed has paused its rate hiking for now but not without warning that resumed tightening is possible. Either way, monetary policy will be kept restrictive for longer than investors previously expected, Fed Chair Powell has said. What does that scenario imply for the economic outlook? Peaks in the federal funds rate are coincident indicators of financial crises caused by restrictive policy, which often trigger credit crunches and recessions. That’s the big risk of the Fed’s higher-for-longer rate path. ... We don’t expect that scenario—we’re in the soft-landing camp—but were it to occur, the highly leveraged commercial real estate market might be the epicenter of the financial crisis.
Money & Credit: Debatable Points
Check out the accompanying pdf and chart collection. Executive Summary: Some economic prognosticators still believe that a credit crunch and recession are just around the bend. Today, we question two of their main arguments: We don’t believe that falling M2 presages anemic GDP growth; contrary to conventional wisdom, there is no reliable correlation between the two. And we can’t see consumers slamming the brakes on their spending and hobbling the economy; they don’t need to with their net worth at a record high and real disposable income growing. … Also: The inverted yield curve correctly predicted the banking crisis earlier this year, but there has been no credit crunch so far; we are monitoring commercial bank lending stats closely. ... And: Dr. Ed reviews “Golda (+ + +).
The Fed, The Deficit & Earnings
Check out the accompanying pdf and chart collection. Executive Summary: The Fed once again alerted the financial markets that the federal funds rate will remain restrictively aloft for longer than generally expected. Managing the market’s expectations in this way rather than raising rates further might lower the risk of a credit crunch and recession. We agree with the FOMC members who collectively anticipate a soft landing. … Also: Inflation has boosted federal entitlements and interest outlays, ballooning the federal budget deficit to worrisome heights, and soon the Biden administration’s spending spree will take it further north. … And: Get ready for a better Q3 earnings season; that’s the message from the earnings estimate data that Joe tracks for S&P 500 companies.
What’s Up With Earnings?
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine the flight paths of S&P 500 companies’ revenues, earnings, and profit margins through Q2’s earnings season. … Forward revenues per share rose to a record high the week before last, and analysts project revenues growth more than doubling next year to nearly 5%. … Forward earnings rose to a record high last week; it does a good job of predicting the earnings outlook during economic expansions. … The forward profit margin has edged up since bottoming in March, after dropping from last year’s record high. … All things considered, we’re sticking with our upbeat earnings forecasts and S&P 500 price targets for now.
China: Party Tricks
Check out the accompanying pdf and chart collection. Executive Summary: China’s recent efforts to stimulate its economy are likely too little too late after a decade of capitalism-eroding policies under President Xi Jinping, a huge property bubble, and a rapidly aging population. August’s economic data do show green shoots of revived growth from the stimulative policy initiatives recently enacted, but not convincingly enough to reinvigorate China’s stock market or global commodity markets. The copper price in particular is highly sensitive to China’s economic situation, but its range-bound price action suggests Dr. Copper is not impressed. … Moreover, China’s forward revenues and earnings metrics have been trending downward since 2014, suggesting that China peaked back then.
Inflation: Twin Peaks Again?
Check out the accompanying pdf and chart collection. Executive Summary: With oil prices spiking again, we can’t help but think of the 1970s when two peaks in oil prices fueled the Great Inflation and caused two recessions. We don’t see history repeating in this case, however. The big difference this time is the disinflationary tech-driven productivity boom we expect this decade. … But we are concerned enough about the oil price spike, the ballooning federal deficit, and other recent developments to return our subjective odds of a recession before year-end 2024 to 25% from 15%. Notably, we don’t view that as the most likely scenario but as a risk to our happier rolling recovery outlook.
Transports Flying Into Headwinds
Check out the accompanying pdf and chart collection. Executive Summary: It’s a been train wreck: Investors have been bailing on the S&P 500 Transportation index in recent weeks, after sending it northward for most of the year. Jackie examines the business pressures they’ve been reacting to, including lighter loads to haul in the wake of the inventory correction at a time of increased fuel and labor costs. … Also: May the best battery developer win EV market dominance. Our Disruptive Technologies segment takes a look at where the top contenders are in this high-stakes race.