Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
The Forces of Inflation vs The Forces of Deflation
Check out the accompanying pdf and chart collection. Executive Summary: The stock market is correcting again, fear is rising again, and valuations are sagging under the weight of a hawkish Fed and rising bond yields. Yet consensus expected S&P 500 earnings continues breaking records. With 2022 shaping up as a volatile year for stocks, we anticipate a rally following the current selloff. … Also: Might “stayflation” frustrate the Fed’s 2.0% inflation goal? … We explain our view of inflation as a tug-of-war between four inflationary forces and four deflationary ones. … And: Treasury Secretary Yellen calls for a new world order featuring a “unified coalition of sanctioning countries,” the exclusion of pariah nations, and the “friend-sharing” of supply chains. Movie: “Inventing Anna” (+ + +).
LNG, Credit & Green Buildings
Check out the accompanying pdf and chart collection. Executive Summary: Natural gas prices are higher than they’ve been in over a decade owing not to demand but supply issues. The crux of the problem: Europe’s need to find non-Russian sources of gas. Jackie reports on the factors that have been turning the screws on the natural gas market and looks at where the S&P 500 Energy sector stands after its huge runup. … Also: A look at how the high-yield, asset-backed, and municipal areas of the bond market are faring with the Fed in tightening mode. ... And: Some innovative green buildings blur the lines between indoors and out.
Corporate Finance In Focus
Check out the accompanying pdf and chart collection. Executive Summary: Today, we roll up our sleeves, lift the hood, and take a close look at the mechanics of corporate finance. … We show how corporate America’s record levels of profits and cash flow are deployed. … We also show how a lack of understanding of corporate finance has given rise to some blatantly false notions of progressives—e.g., that share buybacks drive better stock-price performance and that money used repurchasing shares and paying dividends detracts from what’s available to spend on workers and capital investments.
How Will the Fed Stop The Wage-Price Spiral?
Check out the accompanying pdf and chart collection. Executive Summary: Can the Fed pull it off? Can it surgically subdue inflation without inflicting much collateral damage on the US economy? The now unanimously hawkish FOMC intends to try. Their current game plan seems to anticipate five increases of 50bps each, possibly at the next five FOMC meetings. … Meanwhile, we are on the lookout for signs of peaks in the latest inflation indicators; used car and truck prices are the first. … Rent and wages, on the other hand, are spinning upward along with prices in a mutually reinforcing spiral—calling into question the Fed’s optimism. … Also: A look at the causation loop between inflation and fiscal policy. ... Movie review: “Super Pumped: The Battle for Uber” (+ + +).
Inflation, Semis, Banks & Grocery Shopping
Check out the accompanying pdf and chart collection. Executive Summary: We’ve been on the lookout for signs of peak inflation, and we are deflated to report none to be seen in the latest PPI and small business survey releases. Instead, they telegraphed higher-for-longer inflation in a weakening stagflationary environment. … Semiconductor-related stocks have been beaten down ytd, but analysts expect double-digit earnings growth this year and next, aided by some fast-growing end markets. … Also: Expect smaller domestically focused banks to report stronger Q1 results than their big multinational counterparts. … And: Grocery shopping with no waiting in checkout lines or schlepping bags to the car? Yep: The supermarket industry is going high tech.
On the Lookout For Peak Inflation
Check out the accompanying pdf and chart collection. Executive Summary: War, supply-chain disruptions, soaring labor and commodity costs, monetary tightening causing possible recession—pshaw! All the disturbing global and US economic developments of late haven’t shaken industry analysts’ confidence that their companies are headed for record revenues, earnings, and profit margins over coming months, as passing inflated costs through to customers has been a cake walk. Our analysis of forward revenues and earnings reveals that and more. … Also: We slice and dice March CPI data, inflation expectations, and wage inflation—ever on the lookout for “peak inflation,” which may show up in June or July. … And: Is the housing market cooling off?
TINAC: There Is No Alternative Country
Check out the accompanying pdf and chart collection. Executive Summary: Why is the stock market defying the gravity of extremely grave situations? “TINA” may hold the answer: “There is no alternative” to stocks. … But now she’s been joined by “TINAC”—“there is no alternative country.” Global investors may be taking refuge in the US stock market as a safe haven in an unsafe world. … Today, we comparison-shop equity markets around the world and conclude that foreign stocks are cheaper but for several good reasons. … And: We look at why the US dollar is strong at a time of soaring commodity prices when usually the reverse is true.
Don’t Fight the Fed When the Fed Is Fighting Inflation
Check out the accompanying pdf and chart collection. Executive Summary: The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe, which we peg at 30% and 50%, respectively. … The global economy is stagflating, indicators suggest. … Will reining in inflation take just a nudge from the Fed or an all-out recession-triggering shove? We hunt for the answer in FOMC officials’ recent views and the latest inflation data. … Also: The Bond Vigilantes are back in the saddle again. … And: Stock investors are trying not to fight the Fed as it fights inflation—which should make for a volatile but upward climb to our 2022 and 2023 targets. ... Movie review: “Against the Ice” (+ + +).
Fed’s Hawks, China’s New Priority & Europe’s Gas Seekers
Check out the accompanying pdf and chart collection. Executive Summary: The newly released minutes of the FOMC’s March meeting suggest that even the Committee’s long-time doves now are hawks. So expect upcoming rate hikes of 50bps, not 25bps. The Fed aims to tamp down inflation without igniting a recession; investors are skeptical, but we expect inflation will moderate later this year, bringing the doves back. … Also: Can China achieve its heady economic growth goals amid a Covid resurgence, strict lockdown policies, and all the economic disruptions caused by both? We doubt it. … And: A look at the odds arrayed against EU countries trying to wean themselves off Russian oil and gas.
Another Earnings Season Seasoned with Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Investors should have lots of questions for company managements during the upcoming earnings calls season. First-quarter macroeconomic and survey data paint a picture of modestly improving supply-chain problems but still high costs for manufacturers. For services providers, supply-chain and cost issues continue to strain their ability to meet demand. Profit margins should hold steady this year provided that price increases offset cost increases as we expect. … While earnings and revenue growth rates probably peaked during Q2-2021, analysts’ estimates suggest both remain solidly positive during Q1. … Also: Why the job market in Europe withstood the pandemic better than in the US.
Certainly Lots of Uncertainties
Check out the accompanying pdf and chart collection. Executive Summary: There’s lots of uncertainty about what’s going to happen next in a slew of areas pertinent to investing, including whether the US economy is heading for a recession, how high inflation will go and what the Fed will do about it, how the world order is changing, and how to value stocks amid all this flux. The many unknowns have made for a volatile stock market so far this year. Today, we run through nine uncertainties that have been keeping investors guessing, sharing our analysis of each to shed what light we can. ... Also: More on the “CFO Put”—the notion that corporations flush with cash are providing stock market support via buybacks, dividends, and M&A.
Inflating Earnings
Check out the accompanying pdf and chart collection. Executive Summary: Crosscurrents should continue to buffet the S&P 500’s forward P/E multiple in both directions, but the earnings portion of the equation should rise in the higher-for-longer inflationary environment we project. The S&P 500 is a good inflation hedge provided that the downward-blowing crosswinds continue to be offset by inflating earnings. … Today, we detail all the variables that go into our stock market assessment—including our stagflationary economic outlook; our estimates for corporate revenues, earnings, and profit margins; our target ranges for the S&P 500’s forward P/E and price levels this year and next; and the assumptions we’ve made to derive those targets. ... Movie review: “The Dropout” (+ + +).
Financials, Defense & Fusion
Check out the accompanying pdf and chart collection. Executive Summary: Today, Jackie takes a timely look at prospects for the S&P 500 Investment Banking & Brokerage industry. If the buoyant reception investors gave to Jefferies’ challenged but better-than-expected Q1 results is a bellwether, the industry may be poised to reverse its sector-lagging streak. … Also: A look at how the fiscal 2023 defense budget may take shape as it winds its way through Congress. … And: Fusion holds immense promise for producing carbon-free energy—if scientists can clear a big hurdle. They’re making progress.
It’s Still a Bull Market
Check out the accompanying pdf and chart collection. Executive Summary: March 8 may have marked the stock market’s bottom for this year; it now seems rapidly to be approaching a new record high as investors turn to stocks as an inflation hedge. The fog of war had masked the outlook, but the long-term bull market, punctuated by panic attacks, remains intact. We peg the S&P 500’s upside potential at 5000-6000 next year. … Also: We examine how the S&P 500 has performed historically during ups and downs of both the business cycle and the monetary policy cycle. … And: Melissa examines the economic toll Putin’s war is taking on Europe and how European policymakers are responding.
Three Related Delusions
Check out the accompanying pdf and chart collection. Executive Summary: The ripple effects of three delusions held in high places have triggered a host of interrelated global problems. Putin’s delusion about Ukraine’s sovereignty has led to war and related supply shortages of crucial commodities, which are exacerbating runaway inflation. … Powell’s delusion that the inflation outlook is more benign than it really is has misled bond investors. … But the bond market is finally shedding its delusions and acting more predictably. … How high might the 10-year Treasury bond yield go during this year of rising interest rates and stagflation? We project 3.00% by year-end.
Twists & Turns of the Yield Curve
Check out the accompanying pdf and chart collection. Executive Summary: Two different yield-curve spreads are sending contradictory signals, and one of them is giving some investors the recession heebie-jeebies. But the other, more “official” yield-curve spread suggests no recession in sight, and ditto most other leading indicators. We see a stagflationary environment this year, with real GDP growing an average of 2.0% per quarter and inflation remaining persistent. … Also: A couple of short-maturity spreads relative to the federal funds rate likewise signal no recession. And we look to the Fed for insights on its chances of executing a soft landing and on the significance of various spreads.
Cybersecurity, Transports & Food
Check out the accompanying pdf and chart collection. Executive Summary: Corporate America’s cybersecurity budgets are bound to rise after the White House warned that Russian cyberattacks appear imminent and briefed the likely targets. So Jackie examines the implications for cybersecurity software providers. … Also: The transportation industries—rail, truckers, and airlines—are staring up a mountain of challenges. Yet the S&P 500 Transportation index has been outperforming the broad S&P 500 index so far this year. … And: The Ukraine war is highlighting vulnerabilities in global food distribution systems. Vertical indoor farming could be part of the solution—eventually.
War & Peace
Check out the accompanying pdf and chart collection. Executive Summary: Horrific as it is, Russia’s war in Ukraine hasn’t stopped the US stock market from advancing; investors know that geopolitical crises can present buying opportunities. The war has had significant impacts on commodity prices, inflation expectations, and certain stock market sectors. … The Energy and Materials sectors are benefiting from analysts’ higher revenues and earnings sights, and so are companies generally. Faster inflation is boosting revenues expectations to record highs, and the fact that earnings are following suit suggests most companies are able to pass their higher costs on to customers. ... Also: For auto makers and their suppliers, the war is escalating already extreme supply-chain challenges and upending the global playing field in multiple ways.
More Inflationary Developments
Check out the accompanying pdf and chart collection. Executive Summary: No matter how Putin’s War is resolved, the global world order will continue to face new challenges by the autocrats governing China, Iran, North Korea, and Russia. These Axis of Evil countries won’t stop trying to upend the post-WWII order established and implemented by the US. We look at the ramifications of that reality for globalization, inflation, and the investment outlook. … Also: New kinks in the supply chain mean that supply disruptions won’t be abating anytime soon, which will only increase inflationary pressures. … And: Powell’s speech yesterday confirmed his new, more hawkish stance. But an important yield-curve spread may be on the verge of inverting.
A Very Brief History of The Rise & Fall of Modern Monetary Theory
Check out the accompanying pdf and chart collection. Executive Summary: Now that the Fed is tightening, US monetary policy is no longer bullish for stocks; the “Fed Put” is dead. Replacing it: the “CFO Put,” i.e., the market-buoying activities of corporate CFOs. But the tug-of-war between bearish and bullish forces may not be won decisively by either side in coming months; we see a volatile sideways-trading S&P 500. … Yield-curve inversion fears are misplaced. Inversion doesn’t cause a financial crisis/credit crunch/recession scenario but predicts one. And more convincing predictors are flashing no-recession signals—including the Fed’s lack of inflation-fighting gusto. … Also: Policymakers implemented Modern Monetary Theory during the pandemic, revealing the folly of the theory.
Peace, Defense & the Metaverse
Check out the accompanying pdf and chart collection. Executive Summary: Hopes of a ceasefire in Ukraine have buoyed the stock market; but what comes after a ceasefire? Geopolitically, we expect a new world order to emerge. For the S&P 500, we see valuations pressured by higher-for-longer inflation and the Fed’s lame response. But for now, Panic Attack #74 is probably over… The Fed’s baby-step tightening move yesterday shows it’s in no hurry to corral inflation. … Also: Jackie examines the rising defense-spending plans domestically and abroad, the companies that would benefit, and the implications for the S&P 500 Aerospace & Defense index. … And: South Korea invades the metaverse.
Wage-Price-Rent Spiral
Check out the accompanying pdf and chart collection. Executive Summary: Company fundamentals have been scaling dazzling new heights since mid-2021, yet stock market valuations have toppled ignominiously from their 2021 peaks last spring. That disconnect reflects a tug of war between the opposing effects of high inflation and excess M2 liquidity on valuation multiples. … We have two big concerns about higher-for-longer inflation: Rent inflation is getting uglier, and the wage-price spiral is spiraling faster. In fact, we now see potential for a wage-price-rent spiral. … And: Melissa examines why rents have gone through the roof.
Wage-Price Spiral Spiraling
Check out the accompanying pdf and chart collection. Executive Summary: Today we examine Putin’s War from several angles: The ceasefire demands that Russia has put to Ukraine, the requests for assistance that Russia has put to China, and reasons for surging US gas prices. … We also examine runaway inflation from several angles: What the Fed could do about it, what it will likely do instead, and why the wage-price spiral won’t be stopping anytime soon.
Inflation, Liquidity & Valuation
Check out the accompanying pdf and chart collection. Executive Summary: The big question before stock investors now is: With inflation likely to remain troublesome, are valuations still too high or will ample M2 liquidity keep them elevated? We examine a handful of indicators that shed light on the relationship between inflation and valuation. … Will chronic labor shortages fuel a wage-price spiral over the rest of the decade, as predicted by Charles Goodhart? Our money remains on businesses deploying productivity-enhancing technology to get around their labor-supply challenges. … And: Putin’s War should mean more gradual interest-rate increases ahead, for now. …Also: Dr. Ed reviews “Vikings: Valhalla” (+ + +).
Stagflation, Russian Oil & Gas, And Carbon Credits
Check out the accompanying pdf and chart collection. Executive Summary: Stagflation—higher inflation with slower economic growth—may be upon us, suggests the NFIB’s February survey of small business owners. Most are struggling to fill open positions, which is perpetuating a wage-price spiral. Earlier this week, we raised our inflation outlook and dropped our GDP forecast—resulting in lower expectations for the stock market this year. … And: How will the US and Europe meet their energy needs with less reliance on Russian oil and gas imports? Jackie looks at this question from multiple angles. … Also: How is the EU carbon credit market weathering its first war? Spoiler alert: Not well.