Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Inflation & The Fed
Check out the accompanying pdf and chart collection. Executive Summary: Investors are on the edge of their seats: Will the FOMC raise the federal funds rate (FFR) when it meets this week or pass this time? Key will be how fast inflation is falling, and the Consumer Price Index for May will be released as they deliberate. We say monetary policy is restrictive enough already, as the higher effective FFR implies a tighter environment than the straight FFR suggests. … Also: We recap what consumer inflation measures have been doing for goods and for services since peaking last year. The latter has proven more stubbornly persistent than the former. … And: Dr. Ed reviews “BlackBerry” (+ + +).
The AI Future & Health Care
Check out the accompanying pdf and chart collection. Executive Summary: Don’t fear AI, just China’s AI aspirations. Out with the CPU, in with the GPU. AI is bound to transform every business process, bar none. Three well respected tech visionaries have been describing our AI-enhanced future with optimistic messages that they insist are not hyperbole. … And: Don’t overlook the lagging S&P 500 Health Care sector’s potential for a rebound given exciting developments in its biotech and pharma industries. Jackie recaps some of the highlights.
View From The Pits
Check out the accompanying pdf and chart collection. Executive Summary: Commodities markets have been on a wild ride in recent years, buffeted by pandemic impacts specific to each. The present time finds oil prices weakened by a global supply/demand imbalance, raw industrials prices depressed by China’s weak recovery and US recession fears, lumber prices down owing to soft single-family home construction, and both natural gas and most agricultural prices far from their peaks. … The ripple effects of this commodities scenario include downward inflation pressure and upward dollar pressure. … Also: Joe shares his takeaways from S&P 500 Q1 earnings now that most companies have reported and most analysts have tweaked their forecasts.
Slippery Slopes
Check out the accompanying pdf and chart collection. Executive Summary: Oil prices are slipping notwithstanding Saudi Arabia’s production cuts, which aren’t as effective at halting such slides as they used to be. Too much global oil production capacity in the world relative to too little demand is the problem. … If oil prices are on a slippery slope, so is inflation; indeed, the latest inflation indicators suggest it is continuing to moderate. … As for the latest economic indicators, the NM-PMI and LEI are misleading. Their weakness doesn’t point to a broad-based recession. The forecast still looks like a rolling recession to us.
MAMU & MAMA
Check out the accompanying pdf and chart collection. Executive Summary: Is all the AI euphoria leading the stock market into another “MAMU”—“Mother of All Meltups”? If so, our 4600 target for the S&P 500 by year-end might prove conservative, not controversial. This bull market began differently than most, with higher P/Es at the outset, and this MAMU’s timing would be different, early in the bull market versus late. … Lifting the economy has been “MAMA”—“Make America Manufacture Again.” Manufacturing capacity—flat since 2011—is about to expand given all the factory building implied by the 150% two-year surge in nonresidential construction of factories. Also: The job market refuses to land, but wage inflation is coasting lower. … Dr. Ed reviews “After Waco” (+ + +).
Tech, AI & Irises
Check out the accompanying pdf and chart collection. Executive Summary: The stock price indexes of the S&P 500 Information Technology sector and its top-performing industry ytd, Semiconductors, have left their peers in the dust. Not only has the transformative potential of AI whetted investors’ appetite for tech; so have semiconductor companies’ rosier earnings outlooks now that they’re out from under their inventory glut. Does this tech rally have legs? We think so over the longer term, since earnings prospects are bound to rise as AI spending and the semiconductor cycle head north. … Also: Irises have caught our eye, specifically their potential for “authenticating humanity.” OpenAI CEO Sam Altman envisions that potential changing the world.
Another Hated Bull Market
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500 has been in a bull market since October. So how come there are so many bears refusing to believe that? Today, we recount the reasons that they write off the stock market’s legitimately broad-based advance since fall as just a rally within a bear market. We also correct a few of their misperceptions and outline the bulls’ stronger case. … And for a trader’s perspective on this divisive market, a few words from Joe Feshbach.
Shock Absorbers
Check out the accompanying pdf and chart collection. Executive Summary: Why is economic growth seemingly defying gravity, or at least the gravitational pull of the Fed’s tightening measures over the past year and change? It’s not that the rules of business-cycle physics are defunct. Rather, the pandemic has added new forces to the equation, with distortive effects. Eight unusual forces are acting as shock absorbers to keep the economy from sinking into the widely expected recession. Today, we examine each, including the amount of liquidity in the economy, the uncommonly strong labor market, productivity-enhancing technological advancements ushering in the “Roaring 2020s,” and well-heeled Baby Boomers consuming like there’s no tomorrow.
Covid Again? Upbeat NERI.
Check out the accompanying pdf and chart collection. Executive Summary: China bracing for another Covid wave but will rely on vaccines rather than lockdowns. … Latest earnings was better than expected, but S&P 500 earnings was still down 3.0% y/y, which is better than the -7.0% consensus expectation. Q2 should be down again modestly before comps turn positive again. … Joe reviews the latest NERI readings, which seem to be turning more optimistic.
Around The World
Check out the accompanying pdf and chart collection. Executive Summary: Global economic growth has been lackluster this spring, neither a boom nor a bust. Rebounding global trade and the easing of supply-chain disruptions should moderate global inflationary pressures without a global recession. The Fed and the ECB are committed to raising rates to restrictive levels and keeping them there to bring inflation down. The Fed’s rate is probably where it should be, while the ECB may have a couple more rate hikes to go. The BOJ’s ultra-easy policy continues. The PBOC is massively stimulating, suggesting all is not well in China. Today, we survey the major indicators of global economic growth for insight into how vulnerable the global economy is at this juncture.
Looking Forward To Better Earnings
Check out the accompanying pdf and chart collection. Executive Summary: Our analysis of forward earnings—a good indicator for actual earnings over the next four quarters—suggests an April bottom. That jibes with our mid-cycle-slowdown thesis. … Many who expect a recession instead have been misled by the LEI’s recession signaling. The LEI overrepresents the weak goods side of the economy and underrepresents the strong services side that’s been keeping the economy afloat. … We think the forward profit margin, like forward earnings, has bottomed; margins have been improving for all but three S&P 500 sectors. … And: Still no credit crunch from the banking crisis. … Also: An update on bond market indicators.
Leading The Wrong Way?
Check out the accompanying pdf and chart collection. Executive Summary: So where’s this recession signaled by the LEI and widely expected to come anytime now? Why haven’t high inflation and monetary tightening ground economic activity to a halt yet? Because a recession isn’t coming anytime soon. We never bought that it was inevitable anyway. We’re raising our subjective odds of a soft landing, instead of a recessionary hard one, to 70% from 60%. The burden of proof is now on the pessimists. … So what’s been keeping the economy from a textbook recession? Unusual forces are in play, acting as economic shock absorbers. … Also: Our Roaring 2020s boom-times thesis remains intact. … And: Dr. Ed reviews “Air” (+ +).
Retail, Earnings & Fintech
Check out the accompanying pdf and chart collection. Executive Summary: Three major retailers recently reported Q1 results that provide a glimpse into consumers’ shifting spending trends. Notably, consumers seem to be putting off discretionary purchases. … Also: Perusing YRI’s forward earnings growth charts for S&P 500 industries is an eye-opening exercise: For four unrelated industries, analysts have set extremely high sights. Jackie explores. … And our Disruptive Technologies focus: Walmart’s self-reinvention as a financial services provider to the masses.
Earnings & The Economy
Check out the accompanying pdf and chart collection. Executive Summary: While the stock market’s technical measures of breadth have been disappointing, two fundamental measures have been staging impressive V-shaped rebounds typical of early bull markets: the breadth of analysts’ consensus expectations for S&P 500 companies’ revenues and operating earnings. … Their message is confirmed by recent strength in S&P 500 forward revenues, earnings, and profit margins. … Joe provides a deeper look into what forward profit margins have been doing in recent weeks on S&P 500 sector and industry levels. … All these developments jibe with our soft-landing economic forecast. … So do the latest economic indicator releases.
Economic & Financial Stress & Stability
Check out the accompanying pdf and chart collection. Executive Summary: Two different recent surveys taking the pulse of businesses—one measuring sentiment among small business owners nationwide and the other manufacturing activity in New York State—showed depressed readings. The problem isn’t demand but the ability to supply given the tight labor market. … Two recent Federal Reserve reports—measuring the household debt and credit of US consumers and the financial stability of the economy generally—showed that neither the consumer nor the banking sector nor the financial system generally is especially stressed.
Disintermediation, Disinflation & Dystopia
Check out the accompanying pdf and chart collection. Executive Summary: The Fed sought to allay fears of bank runs when it provided backstop funds to banks. Consider the fears allayed—so far, at least. The disintermediation threat hasn’t descended; it hasn’t wrought a credit crunch, a recession, or widespread economic destruction. Now if fears aren’t stoked by further talk of bank runs, maybe, just maybe, the threat will go away. … Also: The high-inflation saga‘s loose ends all seem to be resolving now in a Hollywood-style happy ending. … And: The latest episode of the debt ceiling drama playing out in Washington is ably narrated by Capital Alpha’s Jim Lucier. … Lastly: Dr. Ed reviews “Beef” (+ + ).
Travel, Homes & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: Maskless and Covid-free, Americans have been venturing further abroad this year, a trend that has saddled companies with domestic-travel-related businesses with tough y/y comparisons. Airbnb and Wynn are prime examples. … Also: Jackie examines the curious divergence between the share price performances this year of two housing-related S&P 500 industries, Homebuilding and Home Improvement Retail, which usually perform in lockstep. … And: Our Disruptive Technologies focus this week is on utilities’ use of hydrogen to produce electricity.
Inflation During & After The Pandemic
Check out the accompanying pdf and chart collection. Executive Summary: The inflation problem of recent years has proven to be transitory for consumer goods but persistent for consumer services. Even so, overall inflation has been moderating this year. In our soft-landing economic scenario (60% odds), we see the PCED rate falling into the 3.0%-4.0% range over the remainder of 2023 and below 3.0% in 2024 and 2025. Consumers’ inflation expectations aren’t so sanguine. In advance of this week’s inflation reports, we review recent developments on the inflation front. … Also: Wage inflation has been moderating too, but it’s still higher than Fed Chair Powell would like to see.
Jobs Driving The Economy
Check out the accompanying pdf and chart collection. Executive Summary: It’s tough to believe that a recession is imminent with the Coincident Economic Indicators index as strong as ever. The CEI’s payroll employment component hit a record high in April, suggesting that the other three (yet-to-be-reported) components did too. Admittedly, the Leading Economic Indicators hasn’t been strong; its weakness purportedly indicates a coming downturn in the CEI and real GDP. But look at its ten components: Services are noticeably absent. So the LEI is not as trusty a recession bellwether as the CEI, in our view. … Also: Joe Feshbach’s insights on the stock market from a trader’s perspective.
Pandemic Of Pessimism
Check out the accompanying pdf and chart collection. Executive Summary: The stock market has been climbing since mid-October even though pessimism has prevailed among economists and stock market strategists. Today, we examine this “pandemic of pessimism”—how widespread it is, our perspective on the bearish case, what the Fed’s staff thinks is ahead for the US economy, and a few of the voices of doom. … We counter that the stock market’s trend is driven mostly by the earnings trend; we doubt QT will send either southward. Earnings growth may be weak in our rolling recession forecast, but growth it will be nonetheless. The labor market’s remarkable resilience reflects the economy’s resilience.
Semis, Onshoring Boom & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: The semiconductor industry is breaking out into the light at the end of its tunnel. Its stocks are up, its CEOs are optimistic, and worldwide semiconductor sales are starting to improve. AMD’s CEO sees big opportunity in the rapid pace of AI adoption. … Also: Jackie highlights some of the many new ventures manufacturers are planning to capitalize on trillions of dollars in government incentives. Their projects may be enough to stave off a recession. … And our Disruptive Technologies segment looks at the government-incentivized green hydrogen opportunity.
Capital Spending, Automation & Earnings
Check out the accompanying pdf and chart collection. Executive Summary: While surveys of business managers’ capital spending plans suggest more spending caution, that could partly reflect all the recession talk recently. Actual capital spending shows no sign of recession; it hit a record high last quarter. … Also: Factory managers are flocking to technological solutions to their many challenges, reports Jackie; Rockwell updates the story. … And: Joe reviews what Q1 results reported to date collectively say about how companies fared last quarter and how results jibe with analysts’ expectations. Notably, analysts haven’t been slashing estimates after hearing managements’ conference calls, as they’ve done in recent quarters.
Global Economy Here & There
Check out the accompanying pdf and chart collection. Executive Summary: We’re not among the vocal doom-saying economic prognosticators. We say there’s a 60% chance that the economy will land softly this year and pick up speed next year, fueled by productivity gains. … Also: We update our rolling recession watch, zeroing in on two loan-dependent industries likely to be rolled over next: autos and commercial real estate construction. … And: Melissa examines why inflation is stickier in Europe than in the US and discusses other economic headwinds facing the Eurozone. These headwinds and the Europe MSCI’s current valuation make us less bullish on European stocks than we were last June.
China, Energy & CO2
Check out the accompanying pdf and chart collection. Executive Summary: China’s President Xi has been pursuing an ambitious agenda for the nation, brazenly at that. Jackie reports on measures China has taken to step into the limelight on the world stage, beef up its military might, tighten its grip over multinationals operating there, and get its currency into global circulation. … Also: Energy markets are sending mixed signals, clouding the forecast. For the oil industry, tumbling earnings and revenues consensus expectations may be off the mark if optimistic oil price forecasts pan out. … And in our Disruptive Technologies segment: Expect to see more companies capturing their carbon—and attractive tax credits.
Tech, Staples & Robotaxis
Check out the accompanying pdf and chart collection. Executive Summary: Before long, every large corporation will be following in PricewaterhouseCoopers’ footsteps and trying to leverage AI to their advantage. Microsoft is well positioned to benefit via its OpenAI investment and Azure cloud computing service. … Consumer Staples companies have turned investors’ heads with stellar March-quarter results, buoyed by pricing power. But their unit sales growth might be vulnerable to price-sensitive consumers’ disloyalty. … And in our Disruptive Technology segment, Jackie explores the Achilles’ heel of autonomous vehicles: situations they haven’t been programmed for.