Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
The Godot Recession
Check out the accompanying pdf and chart collection. Executive Summary: We’re raising the subjective odds we assign to the no-landing economic scenario through year-end 2024 (by 10% to 85%) and lowering our odds of a hard landing (by 10% to 15%). But we’re keeping close tabs on hard-landers’ latest arguments. Today, we summarize the main ones and give our rebuttals. … The biggest issue dividing the two camps is the outlook for consumer spending, representing over two-thirds of nominal GDP. If consumers don’t pull back on spending once their pandemic-related savings run out, an economy-wide recession would be a stretch. We say they won’t retrench, having other sources of purchasing power. ... And: Dr. Ed reviews “Barbie” (+).
Industrials, Tech & Identifying Humans
Check out the accompanying pdf and chart collection. Executive Summary: US government incentives offered to entice manufacturers to set up shop in the USA have hit their mark: Manufacturers in huge numbers, domestic and foreign, have been revamping their supply chains to relocate their production facilities to the US. It’s not always easy, as Jackie explains. But the boost to US economic activity is quantifiable and growing. … Also: AI is here, but all the ways it may disrupt markets are still unknown; will it dislodge the leaders in search and office software, Alphabet and Microsoft? … And: The dilemma of how to tell whether online content was human- or AI-generated has a solution, says one father of AI, involving eyeballs, orbs, and Worldcoin.
Over There & Over Here
Check out the accompanying pdf and chart collection. Executive Summary: We keep tabs on how well the world economy is faring by monitoring our Global Growth Barometer as well as the “flash” S&P Global PMIs for the major developed economies. “Soft landing” best describes what the global economy has been undergoing, while “no landing” characterizes the slowly growing US economy. … China’s economy has struggled under the weight of several problems; we doubt the leadership can fix them as promised. … In the US, the latest consumer confidence survey shows that the labor market remains strong.
Workers Of The World: Strike!
Check out the accompanying pdf and chart collection. Executive Summary: What’s on our worry list? Yesterday, we covered urban office real estate, which adds credit availability concerns to our worry list. Today, we look at the labor market, specifically the unrest fomented by the effects of the pandemic and inflation. … Labor unions have grown in might, their members are striking, and employers are being forced to meet their demands. … So we are adding a renewed wage-price spiral to our worry list, which could happen if a rebound in wage inflation leads to resurgent consumer price inflation.
Rolling Recession Rolling Over Commercial Real Estate
Check out the accompanying pdf and chart collection. Executive Summary: The urban office real estate niche of the commercial real estate market is increasingly distressed owing to the work-from-home trend escalated by Covid. But the problem is contained to the office districts of big cities, and we expect the fallout to be contained too: Sellers of distressed properties will take losses but find buyers, exposed banks will further increase loan loss provisions, increased M&A activity among small banks may result; but the problem won’t domino into a crisis of the banking system or the economy at large. … We detail why with our analysis of data from the Fed. … Also: Dr. Ed reviews “Oppenheimer” (+ + +).
Defense, China &Quantum Computers
Check out the accompanying pdf and chart collection. Executive Summary: In these geopolitically tense times, countries need to build more formidable military arsenals to deter aggressors—which for defense contractors means surging demand. Meeting it may be a challenge, admitted Lockheed Martin on its Q2 earnings call, voicing the need for a stronger supply chain; investors were swift to punish the stock. Jackie provides context with earnings and valuation data for the S&P 500 Aerospace & Defense industry. … Also: China’s real estate crisis continues to deepen. News of the most recent property developers to default has sunk China’s junk bond prices. … And: The race for quantum computing supremacy among Google, Amazon, and IBM.
(Hot) Global Soft Landing
Check out the accompanying pdf and chart collection. Executive Summary: Globally, economic growth has been on a downtrend since mid-2022 according to our Global Growth Barometer. Recent drags include the hot summer, Americans’ weaker demand for imports as they spend more on travel and other services, and headwinds in Europe and China unique to them. … Since we don’t expect the US to enter a recession anytime soon, we expect the bull market in stocks to continue. Our new S&P 500 targets for year-end 2024 and 2025 suggest the bull market has legs. … And: Joe explains the importance of the MegaCap-8’s expected earnings turnaround. With these eight stocks representing 27% of the S&P 500’s market cap, their outperformance could power the entire market higher.
Dismissing The Dismal Definition Of Economics
Check out the accompanying pdf and chart collection. Executive Summary: The conventional wisdom is that economics is the study of how best to allocate scarce resources—a dismal proposition. I disagree: Economics is all about using technology to create and spread abundance—a much more uplifting definition. The dismal framing taught in universities seems to have produced economists biased toward pessimism. Perhaps that’s why most—after ample evidence that the economy is thriving—are just starting to accept that a recession is not about to happen. … Today, we examine the consensus views of economic forecasters, including within the Fed, and supply context to their outlooks in the form of what inflation has been doing, especially wage inflation.
Transitory Inflation Sets Stage For Immaculate Disinflation
Check out the accompanying pdf and chart collection. Executive Summary: Big banks’ top managements sounded relatively sanguine about the economy as they reported solid Q2 results, though JP Morgan CEO Jamie Dimon hasn’t totally abandoned the recession storyline that spooked investors a year ago. … There are two versions of the bearish economic script now, one seeing recession at the hands of savings-drained consumers and other seeing recession at the hands of the inflation-fighting Fed. We counter these narratives with data on consumers and liquidity and by making our case for “immaculate disinflation,” the notion that disinflation doesn’t require a recession.
Travel, Banks & AI
Check out the accompanying pdf and chart collection. Executive Summary: Americans are traveling like never before, with record numbers flying to do so. Post-pandemic “revenge travel” has sent the valuations of travel-related stocks skyward too. Jackie takes a timely look at what could go wrong. … Also: Banks’ soon-to-be-released 2Q earnings will show investors whether large banks have continued to fare way better than small ones—shedding light on whether the valuations of the latter have been overly punished. The S&P 500 Regional Banks index has dramatically underperformed the S&P 500 Diversified Banks index ytd. … And: In our Disruptive Technologies segment, a look at how AI is being deployed to speed and improve drug development.
Sunny Or Cloudy Earnings Season?
Check out the accompanying pdf and chart collection. Executive Summary: We see reasons for optimism that upcoming inflation releases and Q2 earnings news will please stock investors. We expect to learn that inflation continues to moderate in response to monetary policy that’s restrictive enough. And we expect Q2 earnings to be less bad than analysts are predicting. That’s because analysts’ estimates usually are too pessimistic at the start of reporting seasons and because the macroeconomic backdrop likely provided good revenue and earnings support. We look at some of the macro influences on specific industries. … And: Joe examines analysts’ ever-changing earnings growth expectations through various lenses—by index, sector, and in the context of historical trends.
Stay Home Or Go Global?
Check out the accompanying pdf and chart collection. Executive Summary: Global stock markets have climbed a wall of worry impressively this year despite all the global headwinds—including lackluster GDP growth, high inflation, and the tightening of many central banks’ monetary policies—as well as regional headwinds in Europe and China. The markets’ resilience may reflect investors’ relief that worst-case scenarios didn’t pan out. … Japan’s stock market is a case in point. It’s been soaring despite investors’ uncertainty over the BOJ’s next move. Will this holdout among central banks at long last lift its ultra-easy monetary policy and adjust its yield curve control program accordingly?
Fully Employed
Check out the accompanying pdf and chart collection. Executive Summary: June’s newly released employment report gives us clues about June’s not-yet-released CEI, and the CEI closely tracks GDP. So from the employment report, we extrapolate that June’s CEI will likely confirm that real GDP grew around 2.0% y/y during Q2, close to the Atlanta Fed’s current prediction (2.1%). A recession is still possible if the Fed keeps tightening, but we see just a 25% chance of a hard landing. … Also: A look at our resilient labor market. Wage inflation continues to moderate, but wages adjusted for inflation have resumed their growth trend—suggesting revived productivity growth. … And: Dr. Ed reviews “The Diplomat” (+ +).
Getting Harder To Be A Contrarian
Check out the accompanying pdf and chart collection. Executive Summary: Since last summer, when conventional wisdom held that a recession was coming, we argued that one was already going on, rolling through the economy in stages instead of walloping it all at once. Now that the consensus view is moving toward no recession coming after all, and relieved investors have driven the stock market higher, our contrarian instincts are on high alert. The no-show recession could still show up, and we are on the lookout. … Today we revisit the main reasons that some respected observers still expect a recession, and we weigh in on each. The upshot: We’re not changing our (recently raised) subjective odds of a soft landing, at 75%, for now.
Rolling Recovery
Check out the accompanying pdf and chart collection. Executive Summary: Instead of the economywide recession that was widely expected to result from the Fed’s monetary tightening, recessionary weakness rolled through different areas of the economy at different times. Now that rolling recession is turning into a rolling recovery. Accordingly, we’re raising our Q2 real GDP forecast from 1.0% to 2.0%, followed by 2.0% in Q3 and Q4. We now see a 75% chance of a soft landing (up from 70%)—subject to change depending on what the Fed does, which depends on what inflation does. … We expect inflation to continue to moderate, with a headline PCED rate closer 3.0% by year-end, down from 4.6% in May. ... And: Dr. Ed reviews “Ghosts of Beirut” (+ + +).
Brokers, Earnings & Green Steel
Check out the accompanying pdf and chart collection. Executive Summary: Is capital markets activity finally picking up? In Jefferies Financial’s recent earnings call, Jackie found reasons to suspect so, including a 16% q/q surge in advisory and underwriting business. Moreover, the IPO market appears to be reviving, and analysts see good earnings growth next year for the S&P 500 Investment Banking & Brokerage industry. … Also: A look at which S&P 500 sectors and industries analysts expect to grow earnings the most and least this year and next. Notably, the Consumer Discretionary and Communication Services sectors top the list for both years. … And: Companies stepping up to the challenge and opportunities of producing green steel.
More AI & More Lithium
Check out the accompanying pdf and chart collection. Executive Summary: AI is sparking a new industrial revolution that’s bound to transform business processes in every industry. But capitalizing on the promise may mean upgrading legacy IT systems in multiple corporate areas—launching a new technology capital spending cycle. Jackie looks at how companies in various industries are planning to leverage AI to their advantage. … Also: A more efficient way to extract the lithium that electric vehicles’ batteries use is under development. If direct lithium extraction proves viable, it could do for lithium production what fracking did for oil production. That could mean cheaper EVs, EVs with expanded driving range, or both.
Europe, What A Drag!
Check out the accompanying pdf and chart collection. Executive Summary: The Eurozone’s economic outlook has darkened, and we’re not nearly as bullish on European equities as one year ago. … The ECB’s interest rate hikes so far have triggered a technical recession, which is bound to worsen because the region’s stubbornly high inflation implies no end to the tightening in sight. … Other red flags: Analysts have been cutting consensus earnings estimates; high interest rates have depressed demand for business loans to 2008 levels; Europe’s energy resilience could be challenged this winter; and the GDP of Europe’s biggest economy, Germany, is projected to contract this year. … Risks associated with China trade present yet another headwind for the European economy.
Baby Boomers Retiring On $75 Trillion In Net Worth
Check out the accompanying pdf and chart collection. Executive Summary: There’s a $75 trillion-wide hole in the theory that consumers’ running out of pandemic savings will sink the economy; that’s the size of Baby Boomers’ collective nest egg. What these seniors don’t pass on to their heirs, they’ll be spending in their Golden Years. … More Boomers than not have retirement savings, reveals data on retirement account ownership by generation cohort, and many face mandatory distributions soon. … Also: The CEI and LEI are conflicted on the question of whether a recession is around the bend or not. We believe not, and investors are coming around to that view too.
Transports & Batteries
Check out the accompanying pdf and chart collection. Executive Summary: As consumers continue to celebrate their freedom from Covid with vacations and other experiences, spending less on tangible things, not only retailers have felt the sting—and not only last year. Transport companies continue to report less freight to haul, as FedEx’s recent earnings report illustrated. Jackie examines the S&P 500 Transportation industry’s demand problem. On the bright side, fuel costs have fallen, and analysts are optimistic about improved results next year. … And: When the solid-state batteries for EVs now being developed become commercialized, the much greater driving range they offer may be just the shove the EV market needs to take off.
Inflation Here & There
Check out the accompanying pdf and chart collection. Executive Summary: High rates of US inflation are one of the pandemic’s many shockwaves. As these continue to recede, so should inflation—and without further Fed tightening. Goods inflation already has plummeted from 14.2% y/y at its peak to 0.6% in May. High rent inflation is buoying the headline CPI rate, but it should normalize as pandemic effects fade. … In Europe, elevated inflation rates are dropping as well, even though the war in Ukraine grinds on. … In China, inflation isn’t the problem; post-lockdown economic weakness is. The ailing property market doesn’t help. The PBOC is easing in response.
Hop, Skip & A Jump?
Check out the accompanying pdf and chart collection. Executive Summary: The ranks of stock market bears are thinning as investors increasingly concede that no recession is on the horizon. Inflation will continue to drop, with positive—not negative—effects on earnings, we contend, because profit margins have been hurt—not helped—by high inflation. Lower inflation should boost margins and earnings. … The ranks of stock market bulls are growing, their case strengthened by broadening stock market leadership and more bullish sentiment. … Also: We don’t buy the argument that recession will descend once consumers spend their pandemic windfalls, for several reasons. … And: The latest economic releases support our rolling-recession-with-disinflation outlook. ... Finally, Dr. Ed reviews “FDR” (+ + +).
Hawkish Pause, Rotation & Tech
Check out the accompanying pdf and chart collection. Executive Summary: The FOMC voted not to tighten further for now, as we had expected, and raised its real GDP projection for this year to 1.0%—suggesting a soft landing. … June has seen a dramatic rotation in stock market leadership: Tech has underperformed the S&P 500 this month to date after outperforming since October; the mtd performance winners are Consumer Discretionary and Materials, previous underperformers. Jackie unpacks why. … Also: A look at what’s been driving up valuations in various Tech sector industries. … And: Will genetically altering food to make it more delicious have unforeseen consequences?
All About Earnings & Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Like the economy, earnings have been landing softly; revenues haven’t landed at all. The S&P 500’s Q1 results imply earnings weakness totally due to margin contraction as businesses battled fast rising costs. … Analysts see y/y earnings gains resuming in Q3 and Q4, for full-year earnings growth of 0.4% followed by 11.4% next year. … We see a U-shaped earnings recovery and are tweaking our estimates for S&P 500 revenues, earnings, margins, and the price index. Our year-end targets for the S&P 500 are 4600 this year and 5200 next. … Inflation continues to moderate nicely, which should stay the Fed’s hand.
Long & Variable Lags?
Check out the accompanying pdf and chart collection. Executive Summary: The economy has responded to monetary tightening quickly, our research finds, not with “long and variable lags” as monetarism theorizes. Today’s economy and financial systems are exceptionally resilient. … Among some of the reasons: A deluge of post-pandemic fiscal spending has dulled the impacts of tightening. Certain typically interest-rate sensitive industries have been atypically resistant to tightening because of pandemic effects specific to them. Tighter credit conditions after the banking crisis have not triggered a widespread credit crunch. Consumers’ excess savings are dropping fast, but the economic effects are offset by retiring Baby Boomers’ massive net worth. AI and other tech advances have kindled the animal spirits of economic actors.