Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Transitory After All
Check out the accompanying pdf and chart collection. Executive Summary: It’s no longer debatable: October’s headline and core CPI excluding shelter reveal that inflation has turned out to be a transitory rather than persistent problem. Rent-of-shelter inflation and nonhousing services inflation are coming back down to Earth more slowly but surely too, as the pandemic effects lifting them all are finally dissipating. … Treasury Secretary Yellen said that the supply of Treasuries didn’t push yields up in October, yet her actions easing supply concerns speak louder. … Also: Small business owners have plenty of job openings but not enough qualified job applicants. …. And: Joe finds just a handful of big companies account for lowered S&P 500 Q4 earnings expectations.
Relevant Matters
Check out the accompanying pdf and chart collection. Executive Summary: Today, we focus our observations on earnings, valuation, and inflation. … S&P 500 companies’ collective Q3 earnings, forward earnings, and forward revenues all stand at record highs. But analysts’ earnings estimates for future quarters have been dropping. … There’s not always a neat inverse correlation between stock market valuations and bond yields. One reason: The MegaCap-8 stocks represent an outsized chunk of the S&P 500’s P/E; but with less leverage than most companies, interest rates affect them less. … Our moderating inflation outlook suggests no more federal funds rate hikes this tightening round; we examine some of the data it reflects.
Stock Investors Back In The Saddle Again
Check out the accompanying pdf and chart collection. Executive Summary: The stock market has a good track record as a business-cycle indicator, even though last year’s bear market was a false alarm, as investors expected a recession that never came. Since that bear market ended, in October 2022, the stock market has been in a bull market, with its August-through-October weakness simply a correction. Now the Bond Vigilantes and their concerns have retreated, clearing the way for the S&P 500 to rise to our targets of 4600 by year-end 2023 and 5400 by year-end 2024. … Such expected stock market strength jibes with our economic outlook, which presumes that a recession isn’t likely before the end of 2024. ... And: Dr. Ed reviews “NYAD” (+).
Global Growth Fears Hit Industrials & Materials
Check out the accompanying pdf and chart collection. Executive Summary: Low hopes for the global economy have been weighing on the share price indexes of the S&P 500 Industrials and Materials sectors, especially this week. Today, Jackie examines some counterintuitive stock price action among select industries and companies within the two sectors. For example, automating factories should be a promising business these days, but investors have punished two players in this space, Emerson and Rockwell, for disappointing recent quarters. Conversely, the S&P 500 Steel industry’s share price index has been performing well despite analysts’ low earnings expectations, lifted by a legal win for continued US tariffs on steel imports and the end of the UAW strike.
Captain America
Check out the accompanying pdf and chart collection. Executive Summary: The US economy has remained remarkably strong in the face of the Fed’s attempts to tame inflation at the economy’s expense. So far, so good: Inflation has been moderating nicely but not bringing the economy down with it. Today, we review the major reasons for the US economy’s resilience. … In contrast, the global economy is weak as evidenced by the plunge in oil prices. Record US oil production has helped to lower oil prices from their September peak. ... And: Joe looks at analysts’ estimate revisions activity in the wake of a strong Q3. Despite that strength, Q4 estimates are dropping at rates faster than usual.
What’s Next? Pickleball!
Check out the accompanying pdf and chart collection. Executive Summary: Back and forth we expect the bond and stock markets to bounce for the foreseeable future as the bulls and bears in each market alternate control. We see the 10-year Treasury bond yield ending the year at 4.50% and the S&P 500 at 4600. Next year, we expect continued volleying between bulls and bears to keep the bond yield rangebound between 4.00% and 5.00% and the S&P 500 rising to 5400 by year-end. … As for the economy, we think surprisingly strong economic growth is likely next year, led by a productivity boom that continues for the remainder of the decade—our “Roaring 2020s” scenario taking hold at last.
Throwing Caution To The Wind
Check out the accompanying pdf and chart collection. Executive Summary: Last week brought epic rallies in both the stock and bond markets. We think the stock market’s correction is over and that the S&P 500 is back on track to end the year at 4600. All 11 sectors gained ground last week, many enjoying their best week in nearly a year. … As for the bond market rally that carried the 10-year Treasury bond yield down to a more comfortable distance from 5.00%, the wave of buying had multiple drivers. Nevertheless, beware of the Bond Vigilantes. … Also: Recent economic news supports our Immaculate Disinflation theory.
Burritos, Stocks & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: Packaged and fast food companies keep raising their prices, but consumers at nearly all income levels aren’t blinking at paying more. That was a common theme Jackie heard in the Q3 earnings calls of McDonald’s, Chipotle, and Unilever. … Also: What a difference a date makes! The stock market’s leaders and laggards among sectors over the first seven months of the year—prior to the S&P 500’s July 31 peak—bear little resemblance to those since July 31; former laggards-turned-leaders Health Care and Energy are cases in point … And: The discovery that large stores of pure hydrogen exist in nature holds exciting potential for powering the planet without polluting it.
Other Central Bankers & The MegaCap-8, Again
Check out the accompanying pdf and chart collection. Executive Summary: Today, Melissa reviews how monetary policies are being conducted outside the US. Japan’s BOJ has given itself more latitude in policy decisions, retracting a commitment to retain its long-standing ultra-easy stance and widening its target interest-rate range. … China’s PBOC and central government have been working to stimulate its economy by numerous means. ... Europe’s ECB finally paused its rate-hiking recently after a 10-hike streak and trimmed its balance-sheet assets; no more rate hikes or reductions are likely for a while. … Also: Joe updates data on the MegaCap-8 stocks’ growing share of the S&P 500.
Trick Or Treat?
Check out the accompanying pdf and chart collection. Executive Summary: Treat: Consumers’ soaring net worth since the pandemic has reduced their need to save, in our opinion. That might explain why consumer spending has been resilient despite hard-landers’ warnings that households were depleting their excess saving and would have to retrench by now. … Treat: Inflation is still on course to fall to the Fed’s 2.0% target. … Trick: The Treasury might spook investors again on Wednesday when it details its next round of financing needs.
Geopolitics, GDP & Inflation
Check out the accompanying pdf and chart collection. Executive Summary: We recently raised our subjective odds of a US recession before year-end 2024 from 25% to 35% mostly because the geopolitical risks continue to escalate. We see two potential scenarios that could result in a recession, but they don’t warrant raising our recession odds at this time. The US economy remains resilient; we review recent areas of strength. … Also: Further escalation of war in the Middle East could bring unsettling uncertainty to the stock market against a backdrop of well known headwinds and a troubled Chinese economy. … And: We review the latest inflation news. We don’t expect the Fed to surprise markets with a rate hike this week.
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.