Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Banking Crises, Then & Now
Check out the accompanying pdf and chart collection. Executive Summary: The S&L crisis of 1990 caused a mild, short-lived recession impacting earnings but not triggering a bear market in stocks. Conversely, we had a bear market last year but no recession (yet?). Similarly, though, the commercial real estate market was hit hard during 1990’s banking crisis and stands now in the eye of the SVB storm, since small banks—the most vulnerable—make most CRE loans. … Also: Do you wonder why consumer spending has been so resilient lately? That huge demographic cohort that disrupts the status quo at every life stage is at it again. … And: For stock traders, Joe Feshbach’s take on the market. ... Finally: Dr. Ed reviews “Godfather of Harlem” (+ + +).
Financials, Semis & The Fountain Of Youth
Check out the accompanying pdf and chart collection. Executive Summary: Financial companies have had it rough lately, but those involved in the capital markets should benefit from easy y/y comparisons this year. Jackie recaps takeaways from Jeffries’ fiscal Q1 earnings, as the early reporter may be a bellwether for the industry, as well as industrywide data and analysts’ expectations for the S&P 500 Investment Banking & Brokerage industry. … Also: The semiconductor industry downturn may finally be ending, says Micron Technology’s CEO. But semiconductor investors are already focused on 2024’s better growth prospects. … And in our disruptive technologies spotlight: a breakthrough in anti-aging science.
Churning Earnings
Check out the accompanying pdf and chart collection. Executive Summary: The SVB debacle has depressed the S&P 500 Financials sector’s market-cap share further below its earnings share. And the S&P 500 Bank Composite hasn’t ever been this cheap relative to the S&P 500 (i.e., since the mid-1980s start of the data). We liked the Financials sector before SVB imploded and like it even more since, as the fallout we expect doesn’t include systemic contagion and does include more M&A activity. … Also: While analysts have been cutting their 2023 earnings estimates for S&P 500 companies, the index’s forward earnings increasingly reflects the higher 2024 estimates and has stopped falling. ... Also: Joe discusses some impacts of Standard & Poor’s sector and industry reclassifications.
‘Yes, There Will Be Growth in the Spring!’
Check out the accompanying pdf and chart collection. Executive Summary: Stock market bears have long expected a recession, but now the prospective credit crunch that could cause one seems more plausible after the SVB crisis. … We expect that the Fed and FDIC will contain the crisis. But we do see regional banks paying higher deposit rates now to prevent disintermediation. That’s likely to hurt their profitability and prompt more cost-saving M&A activity among them. … Also: The latest batch of economic indicators supports a soft-landing scenario.
‘Is It Safe?’
Check out the accompanying pdf and chart collection. Executive Summary: The recent banking crisis has heightened fears of a recession. But still the S&P 500 is up ytd—buoyed greatly by the MegaCap-8 stocks. … The SVB debacle hasn’t changed our economic outlook, which pegs the odds of a recession at a relatively high 40%, as we’re not convinced it will lead to a credit crunch that triggers a recession. … We’ll know if the banking system isn’t as resilient as we think if we see deterioration in the Fed’s weekly H.8 data, showing the assets and liabilities of commercial banks. … So far, we think that the SVB crisis will be contained thanks to the Fed’s emergency liquidity facility. ... Dr. Ed reviews “Boston Strangler” (+).
Communication Services & AI
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500’s Communication Services sector has outperformed all ten of its counterparts so far this year, up 18% ytd. Jackie examines the constituent industries and companies that have been driving the sector’s strong showing, with a particular focus on Meta, up 68% ytd. … Also: Companies in diverse industries are harnessing the power of AI in manifold ways to help people work faster, smarter, and even more deceptively (beware of AI fakes!). This week’s disruptive technologies segment highlights some of the players in the AI space and the innovative products they’re turning out.
Looking Ahead To Earnings Season
Check out the accompanying pdf and chart collection. Executive Summary: Industry analysts and company managements have an optimism bias that blinds them to encroaching recessions. So when a recession looms, forward earnings’ reliability as an indicator of actual earnings to come falters. … While analysts have been cutting their 2023 and 2024 earnings estimates for S&P 500 companies since last summer, their expectations for next year are still higher than for this year. As long as that remains the case, forward earnings, which have been declining since last summer, soon should stop falling and start moving higher unless a recession happens. … And: S&P 500 earnings growth ex Energy sector could turn positive in Q2 as Energy de-energizes.
Giving Credit Where Credit Is Due
Check out the accompanying pdf and chart collection. Executive Summary: The spread between the 10-year Treasury bond yield and the federal funds rate inverted in November; such inversions are predictive of credit crunches and recessions. They also tend to predict financial crises that halt Fed tightening. It’s too early to credit the yield-curve inversion for calling a recession, but it was spot on in presaging a crisis like SVB. … Small banks seem vulnerable now to depositor flight, which could prompt a credit crunch impacting small businesses. … But we don’t think a credit crunch would hurt consumer spending and homebuying as much as lower interest rates will boost them. … Our message to the FOMC: Give it a rest.
Other People’s Money
Check out the accompanying pdf and chart collection. Executive Summary: Will SVB be the financial domino that sets off an economy-wide credit crunch that leads to a recession? Maybe not given the Fed’s intervention; but if so, we don’t see another Great Financial Crisis. … Why have banking crises been a recurring cause of US recessions anyway? The crux of the problem is that bankers tend to take excessive risks because it’s not their own money on the line and the government has their backs. … Also, we take close looks at: how Fed tightening has eroded the value of banks’ bond portfolios, the SVB blame game, and SVB’s economic ripple effects. … And: Dr. Ed reviews “Living” (+).
Banks, Tech & Batteries
Check out the accompanying pdf and chart collection. Executive Summary: SVB wasn’t last week’s only bank run: Two crypto-friendly banks that served as the major gateways to the crypto world also succumbed to depositors deciding to take their money and run. Jackie performs brief autopsies and looks at their impact on the crypto markets and the banks positioned to take their place. … Also: Counterintuitively at this time of economic uncertainty, the Technology sector has been outperforming the broader index since its February 2 peak. … And our Disruptive Technologies focus today is on the quest to build a better EV battery.
The Oscars
Check out the accompanying pdf and chart collection. Executive Summary: Within days of the run on SVB, the Fed has donned its “lender of last resort” cape—guaranteeing all bank deposits by all depositors (!), creating a new emergency bank lending facility, and launching a review of what went wrong at SVB. As a result, we don’t see sufficient SVB ripple effects to alter our outlooks for the economy or financial markets. … Also: Inflation has proven both more transitory (consumer goods inflation) and more persistent (consumer services) than expected, but both types have moderated lately. … And: Joe examines the S&P 500 Growth index’s comeback relative to Value after more than a year as the underdog.
The Lender Of Last Resort
Check out the accompanying pdf and chart collection. Executive Summary: While the Fed and FDIC have acted swiftly to contain the SVB debacle, could it still balloon into a financial crisis like previous ones that triggered a credit crunch and recession? It could if it set off a wave of disintermediation at banks broadly, but we doubt that will happen; we think the regulators’ actions will work. … So the incident doesn’t change our outlooks for the economy, stock market, or bond market. But it does revive the “Fed Put.” That’s because the Fed’s actions to stabilize the banking system also stabilize financial markets.
Run For The (Sand) Hill
Check out the accompanying pdf and chart collection. Executive Summary: Tightening monetary cycles often end abruptly when “something breaks” and a financial crisis is triggered. If the Silicon Valley Bank run is that something, it could mean tightening ends sooner and bond yields have peaked. We can’t say for sure that’s the case but can say the debacle should keep the tech sector mired in its rolling recession for longer. While the SVB crisis doesn’t change our economic and stock market outlooks for now, it adds uncertainty until resolved in a way that minimizes systemic shock. … Also: A theory for why labor market demand so persistently exceeds supply points a finger at the Baby Boomers. … Dr. Ed reviews “Till” (+ + +).
China, Defense & AI Videos
Check out the accompanying pdf and chart collection. Executive Summary: China’s economy has recovered after the country lifted its zero-Covid lockdowns. But that news has been eclipsed by the rising geopolitical tensions between the US and China. Jackie examines the escalating tensions. … Also: A look at projected defense spending in the US and China and how the S&P 500 Aerospace and Defense industry’s stock price index has been faring after a super-strong 2022. … Finally, our Disruptive Technologies segment focuses on how AI is transforming the production of movies and video games.
Profit Margin Recession?
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine S&P 500 companies’ revenues, earnings, and profit margins as reported for Q4-2022 and as estimated by industry analysts for 2023. Notably, Q4 revenues grew impressively to a record high, but inflation accounted for much of that. Operating earnings per share fell y/y, and just two S&P 500 sectors saw y/y earnings growth. Profit margins were squeezed by rising labor costs at a time of negative productivity growth. … While Q4 is behind us, its influence isn’t: It has caused analysts to chop earnings expectations for all four quarters of this year. Current 2024 estimates may prove too low if they reflect a recession that never arrives.
Selected Sectors Short Studies
Check out the accompanying pdf and chart collection. Executive Summary: Our base-case economic outlook is upbeat. Stock investors likewise seem optimistic about the economy given which S&P 500 sectors have led the index’s advance since October. We recommend overweighting five S&P 500 sectors this year: Energy, Financials, Industrials, Information Technology, and Materials. … Also: We zero in on the themes and data supporting two of these recommendations, Information Technology, which stands to benefit from companies spending on productivity-enhancing technologies in this tight labor market, and Industrials, which should benefit from strong spending on infrastructure construction, manufacturing capacity, and industrial machinery in a growing economy.
The ‘Roaring 2020s’ Revisited
Check out the accompanying pdf and chart collection. Executive Summary: Productivity was poor last year—declining more than it has since 1974—and growth in unit labor costs was high. But the final quarter of 2022 saw significant improvements in both, and we think the worst is over for both. If productivity continues to improve as companies increasingly solve their labor challenges with technological innovations, that should lead to lower inflation, higher real wages, and better profit margins. That’s the thesis of our “Roaring 2020s” outlook. … Also: The economy has been experiencing a rolling recession that started last year. Today, we examine rolling recessions, past and present. ... And: Dr. Ed reviews “The Whale” (+ + +).
Consumer Discretionary, Utilities & AI Fake Voice
Check out the accompanying pdf and chart collection. Executive Summary: Retailers are wary about the effects of high inflation and rising interest rates on consumers’ discretionary spending. But Target this year stands to benefit from easier y/y comparisons and shoppers looking for alternatives to its rapidly shrinking competitor Bed, Bath & Beyond. Jackie examines. … Also: Will demand for electricity outstrip available supply over coming years with retiring fossil-fuel-powered electricity generation replaced by less reliable green alternatives? That’s what one transmission organization projects. . … And: With voice-cloning software readily available, its potential nefarious (as well as silly) uses may spark new opportunities in identity authentication.
On Valuation & Central Banks
Check out the accompanying pdf and chart collection. Executive Summary: Today, we look at valuations for various investment style indexes. Notably, the S&P 400 MidCaps and S&P 600 SmallCaps—a.k.a. SMidCaps—haven’t been this cheap versus the S&P 500 LargeCaps since 2000. Growth and Value indexes underwent major shifts when the MegaCap-8 stocks were redistributed among them in December. Global markets have been outperforming the US MSCI. They’re collectively still cheap relative to the US. But we wouldn’t stray too far from home for long … And: The underlying structural issues keeping inflation aloft will be solved by market forces, not with monetary policy. … Also: The ECB has been tightening, but perhaps not enough yet.
The Inflation & Valuation Questions
Check out the accompanying pdf and chart collection. Executive Summary: Are stock valuations too high for our inflationary times? Admittedly, last year’s bear market didn’t maul valuations as severely as most do. But inflation has been moderating in a host of areas, which we expect to continue. And if the economy sticks to the rolling-recession script, as we think it will, stocks aren’t overvalued but fairly valued, in our opinion. … Also: For more perspective on the valuation question, we look at various valuation models’ current readings in their historical context, including a valuation model that takes inflation into account.
March Madness?
Check out the accompanying pdf and chart collection. Executive Summary: The stock market beat a hasty retreat in February, spooked by reports of January’s economic strength and the Fed’s dreaded possible reaction. So today we look at what March’s releases of economic data for February might bring. They could be bad news for the markets, but we actually expect the best—viewing January’s strength as anomalous and expecting February’s data to confirm our soft-landing outlook. Accordingly, we still think a new bull market was born last October; it’s just not bursting out of the gate as most bulls do. The market may remain volatile pending more clarity on what the Fed will do. … Also: Dr. Ed’s bearish review of “Cocaine Bear” (-).
On Earnings & Fuel Efficiency
Check out the accompanying pdf and chart collection. Executive Summary: For the S&P 500 index and many of its sectors, forward revenues are at record highs but forward earnings are below their record highs of last year. The disparity indicates a profit-margin squeeze, with several labor-cost-related sources; those stemming from pandemic aftereffects should abate in time. ... And: The fuel efficiency of automobiles has been climbing—with more miles traveled on fewer tanks of gasoline. Increasing use of electric vehicles may be driving this trend. Jackie collects the evidence from two places where EV adoption is ahead of the curve, California and Norway. It’s a nascent trend worth watching given the ramifications for global oil demand.
On US Earnings & India’s Economy
Check out the accompanying pdf and chart collection. Executive Summary: This earnings season stands out from most, and not in a good way: Hearing managements discuss their companies’ Q4 results on conference calls has sent analysts back to their spreadsheets. Consensus earnings estimates for all four quarters of this year have been falling. … Looking at valuations in the context of falling estimates suggests that the S&P 500 isn’t cheap after its runup since October. SMidCaps and overseas stocks are cheaper. ... Also: India aims to usurp China as the go-to nation for outsourcing, hoping to shed its “developing” status and become a global trade leader. But first, it may need to clean up its act.
The Fed, Consumers, China, & Fusion
Check out the accompanying pdf and chart collection. Executive Summary: FOMC sees rates headed higher for longer, but a soft economic landing remains in the cards. …. The Consumer Discretionary sector stands to profit from the drop in prices for gas, cotton, and shipping on the high seas. Lower inflation and higher wages should help, too. …. China’s politicians may hope eliminating zero-Covid policies will boost the nation’s economy. But the likely surge of Covid cases may prompt citizens to enter self-imposed isolation. …. Scientists reported a great advancement in nuclear fusion. But expect many more years of development before we’ll know if fusion will become an economically feasible way to generate carbon-free electricity.
Disinflation?
Check out the accompanying pdf and chart collection. Executive Summary: Inflation peaked in June and continued to moderate in November. The Santa Claus rally should continue unless the Fed’s Grinches get in the way. …. Small business owners still facing labor shortages and raising wages and prices. …. S&P 500 forward revenues, earnings, and margins losing their mojo. And: What if home prices don’t fall much?