Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
On Trade & Earnings
Today, we evaluate whether China or the US has more leverage in the trade war. China has a good hand but depends heavily on the US consumer to absorb its production. Whichever side “wins,” the victory will come at the expense of global growth. … Also: Melissa summarizes the USTR’s report on other countries’ trade barriers that disadvantage US companies doing business abroad, with examples from China, the EU, and Canada. … And Joe notes unusual estimate revision behavior for the first weeks of a quarter: Analysts have been cutting their earnings and revenue expectations even before knowing Q1 results or getting new guidance from managements.
More On Inflation & Bonds
Tariffs are stagflationary, but consensus expectations may be overestimating the inflationary impact and underestimating the downside risks to growth. We evaluate the disinflationary forces that may counterbalance tariff-included price increases. … Also: The bond market’s recent volatility may reflect a fundamental reevaluation by investors at home and abroad regarding the safety of US government debt. The continued decline of the dollar and appreciation of haven assets in Europe support this argument, while the impact of levered Treasury trades unwinding appears to be less significant.
Bonds Away!?
Long-term Treasury bond yields surged last week despite news that March inflation was subdued and consumer sentiment is falling fast. That’s partly because the federal budget deficit is too d@mn high! In the past, recessions and lower long-term bond yields were associated with higher deficits; but the budget deficit has been widening since Covid despite a growing economy. Supply of long-term bonds also affects yields, but less so since the Treasury Department started issuing more short-term debt in 2023. Observers have been perplexed by the rise in long-term yields, but the reason for it may simply be that global demand for US Treasury bonds has shriveled, as Trump’s Tariff Turmoil is raising inflationary expectations.
CEOs On Tariffs, Health Care & 3D-Printed Skin
The best laid plans of many a CEO have been blown asunder by Trump’s Tariff Turmoil. Jackie reports on what corporate leaders are saying about the tariffs’ potential impacts and the strategies they’re considering to keep earnings aloft—and to keep smaller firms afloat. … Also: Investors taking cover in the S&P 500 Health Care sector need to be selective: All of its industries don’t offer the same degree of shelter from the tariffs storm. … And: 3D printing isn’t just for inanimate objects anymore. Scientists are developing ways to 3D-print human organs using live cells.
Tariffs Are More Tumultuous For Foreigners
Global trade is being reordered, and the new US trade policies are likely to slow global economic growth over the near term. But for various reasons, we think the US stock market will outperform its foreign counterparts, especially in the event of a global recession. We maintain our Stay Home, versus Go Global, bias. US stocks are fundamentally stronger than international ones, supported by stronger productivity growth and wider profit margins. … Also: With the US stock market on the precipice of bear market territory, Joe takes a statistical look at bear markets throughout history, including one in 1934 triggered by the White House’s reshaping of trade policy.
Who Will Save The Day?
Amid the recession fears heightened by Trump’s Tariff Turmoil, we take a look at what usually causes recessions. Our Credit Crisis Cycle (CCC) theory posits that financial system crises, unmitigated by intervention, lead to credit crunches. No such crisis has occurred, yet the financial markets are acting as though one has. Their distress is high but not enough to warrant Fed intervention—yet. As it stands, this is a manufactured bear market that can be reversed. … Also: We chat with Jim Lucier of Capital Alpha Partners for a status update on how Trump 2.0’s promised tax cuts are faring in Congress. Our assessment is that regardless of the end result, tax cuts are unlikely to offset tariffs—a tax hike—as they stand.
Annihilation Days
Trump’s Liberation Day last Wednesday triggered Annihilation Days on Thursday and Friday, with the Stock Market Vigilantes giving a costly thumbs-down to Trump’s Reign of Tariffs. Trump officials say they aim to make Main Street wealthy again even if that’s bad for Wall Street. The problem is that Main Street owns lots of equities traded on Wall Street, so the two streets prosper and suffer together. Congress can’t do much to stop Trump given his veto power, but he might get the message that hurting Main Street’s stock portfolios can cause a recession and jeopardize the GOP majority in Congress. If so, he might postpone the reciprocal tariffs, giving trade negotiations time to work. Also, the courts might block Trump’s tariffs. An early end to Trump’s tariff nightmare would result in a V-shaped stock-market bottom. We’re counting on that; the alternative is just plain ugly.
Onshoring, Hidden Bulls & AI In Fintech
The onshoring trend that began under Trump 1.0 and was spurred on by Biden legislation is bound to accelerate with Trump 2.0’s tariffs. Several big corporations have announced new US factories in the blueprint stage already. … Also: Most stocks aren’t as woebegone as market index performance stats suggest. Jackie highlights the S&P 500 sectors and industries that have been chugging on upward so far this year, bucking the market’s trend. … Also: A look at innovative ways that fintech is using AI.
Tariffs Are Messy
With so much focus in the media on how the Trump tariffs can be expected to affect the US economy, Melissa today discusses how they’ll likely affect other countries. Surprisingly, China may be less vulnerable than initially assumed, while the US’s two North American neighbors may bear the brunt of the pain. … Also: What if the tariffs trigger a global recession? The US might outperform the rest of the world’s economies in that case; it’s better positioned to do so for several reasons. … And: Joe’s data on analysts’ estimate revisions for S&P 500 companies in aggregate suggest investors will be treated to better-than-expected Q1 earnings, possibly representing double-digit y/y growth.
Inflation In Trump’s World
Yesterday, we changed our stock market and economic projections owing to Trump’s “Reign of Tariffs”; today, we explain our thinking about the higher inflation we now expect. People’s expectations about future inflation are critical to how high inflation actually climbs since the expectations of economic actors alter their decisions, which Fed Chair Powell often points out. So will the Fed raise the federal funds rate to keep inflation expectations well anchored? Or will it cut the rate to keep the crisis from Washington from crippling economic growth? Our conclusion: Neither. We’re sticking with our “none-and-done” Fed forecast for this year.
Trump’s Reign Of Tariffs: Stagflation Odds Up, S&P 500 Target Down
The expected fallout from Trump 2.0’s Reign of Tariffs undercuts our former bullishness and dims the prospects of our base-case Roaring 2020s scenario for now. It has also drained confidence in the US economy on the parts of everyone from CEOs to consumers to investors. Recent data showing manufacturing faltering and purchasing managers paying higher prices suggest stagflation is already taking root. We’re dropping the odds we assign to our Roaring 2020s scenario from 65% to 55% and upping the odds of a stagflation scenario, which may include a recession, from 35% to 45%. That 45% is also the probability we see that the stock market’s correction will deepen into a bear market in coming months. Yet we still expect an up year, with the S&P 500 rising above 6000 by year-end. ... Also: Dr Ed recommends skipping “Eileen” (- – -).
On Utilities, Inventories & EVs
Utilities long have had notoriously tepid demand, but that may change over the coming decade as more and more planned data centers plug into the grid. Jackie counters the argument that a bubble is brewing in data centers with statistics from a recent report. … Also: Frontrunning the coming Trump 2.0 tariffs is a popular inventory strategy for firms in various industries, but it carries the risks of tying up cash and leaving companies overstocked if sales drop. … And: With a manufacturing compound the size of San Francisco churning out cheaper and faster-charging EVs, China’s BYD may leave Tesla in the dust.
On The Fed, The ECB& Growing Earnings
Fed officials presume that Trump 2.0’s tariffs will lead to one-time price increases. But should the Fed look through “transitory” inflation effects, or are they underweighting the risks of sustained inflationary pressure? … Melissa reports that Trump 2.0’s policies toward Europe have spurred fiscal measures there that take the European Central Bank off the hook for supporting the economy; no one expects the ECB to ease further anymore. … And: Joe reports that the S&P 500 companies should post “back-to-trend” y/y earnings growth this quarter.
Meet Scott Bessent
The actions of Treasury Secretary Scott Bessent will be key to how the financial markets react to Trump 2.0’s economic agenda. Today, Eric shares insights into Bessent’s beliefs and proposals, which may have overly concerned investors recently. Bessent would take a gradual approach to lowering the budget deficit and the dollar, mindful not to stir up market volatility. The dollar’s global dominance is not at risk, nor is the Fed’s independence. … Investors can also relax about the Fed’s decision to slow its balance-sheet paring. It doesn’t represent monetary easing or the end of QT. It’s just a practical measure to lift pressure on reserve balances and should barely affect Treasury yields.
The Fed’s Economic Forecast Versus The Consensus & Ours
Investors clearly fear a recession is coming—that’s what the recent stock market correction suggests. The consensus of economists probably puts the prospect of a recession at 35% (as we now do). Fed officials likely expect to avert a recession by lowering interest rates; FOMC meeting participants dropped their GDP projections last week to 1.7% this year. As for us, we see a fork in the road. One way leads to stagflation, which includes the possibility of a recession (35% odds). But our base case remains the Roaring 2020s (65%), in which a tech-led productivity boom lifts profit margins, propels GDP, suppresses inflation, and fuels wage growth and consumers’ buying power. ... Also: Dr Ed reviews “I’m Still Here” (+ +).
China, War & AI
The Chinese government has unveiled a wide-ranging plan to lift its economic growth, this time by propping up consumption instead of trade. Jackie summarizes the many diverse initiatives to put more power in the pockets of Chinese consumers. … Also: When the US quietly reversed its official position on the independence of Taiwan, an enraged China reacted with a show of military might. Melissa explores the disconcerting notion of a World War III triggered by these tensions. … And: In which industries and professions might AI displace jobs?
Global Rotation
With the US stock market underperforming many international equities markets, we’ve been warming to a “Go Global” stance—though we don’t advise a major shift given the possibility of a punishing global trade war. Today, Eric assesses the stock market fundamentals in major economies. We still aren’t keen on China. … Also: Melissa reports on the green shoots evident in European and Asian economies. … And: Joe reports that February’s net earnings estimate revisions by analysts were downward in the extreme, sending the S&P 500’s NERI index to a 25-month low. Such rapid NERI deterioration suggests analysts have shaved estimates broadly for reasons beyond company fundamentals. They may be getting the tariff memo!
Trump 2.0 & Global Capital Markets
Foreign investors held 37% of US equities last quarter. They’ve clearly sold some of that in the wake of the Trump 2.0 uncertainties. But might the US’s perceived beggar-thy-neighbor policies actually reverse the tide of inflows into US assets? Eric explains why that fear is unlikely. … Also: While a goal of Trump 2.0 policy is to lower US Treasury bond yields, the administration’s protectionism may work against that goal. US protectionism has motivated foreign economies, specifically China and Germany, to stimulate their domestic demand via deficit-financed fiscal easing, driving up their bond yields—which may limit how low US yields can go.
The Bull Versus The Bear Case
Will all the Trump turmoil deepen the recent stock market correction into a bear market? Very few bear markets have occurred without accompanying recessions. If no recession looms, today’s historically stretched valuations could be sustained, Dr Ed says. But the Trump factor is unpredictable, and a trade war could cause a recession. Would Trump pivot before that point, pressured by the Stock Market Vigilantes? … Read on for Ed’s balanced assessment of both the bear and bull market cases. … And an unsettling question for the future: Might the “Roaring 2020s” give way to a repeat of the 1930s, “The New Global Disorder of the 2030s”? It’s all up to Trump. ... Also: Dr Ed pans “Paradise” (- -).
Lowering Our S&P 500 Targets
It has dawned on Wall Street (and us!) that President Trump’s tariffs aren’t negotiating chips to help the US lower tariffs around the world, promoting free trade. They’re trade barriers, triggering other countries to respond in kind, and they jeopardize US inflation and economic growth. We expect Mr. Trump to relent lest he cause a recession that reverses the GOP majority in Congress during the 2026 mid-term elections. But in response to the now heightened risk of stagflation, we are lowering our S&P 500 valuation expectations and year-end price targets. … Also: Eric discusses the potential for Fed rate cuts this year based on the latest inflation data.
On Japan, Crude Oil & Earnings
Yes, there’s been upward pressure on Japanese interest rates and the yen at a time of downward pressure on US rates and the dollar. But no, Eric explains, we’re not worried about a repeat of last year’s carry-trade havoc in global markets. Resting our minds are recent Japanese and US economic data and signs that yen-funded carry trade positions aren’t huge. … Also: Melissa explains why we expect the price of oil to remain in a narrow range as countervailing forces pressure it in both directions. … And: Joe reassures us that the recent plunge in S&P 500 companies’ aggregate Q1 earnings growth expectations is typical as quarters wind down.
Going Global Slowly
While we’ve long favored US stocks over global ones, recent developments in Germany and China have made us more sanguine on investing in economies abroad. We’re maintaining our “Stay Home” investment approach but lightening up on the degree with which we would underweight the MSCI All Country World ex US index relative to the MSCI US index. Eric explains the changes in the macroeconomic and political backdrops of the EU and China that have decreased our bearishness on equity markets outside the US.
High Noise-To-Signal RatiosUnnerving Stock Investors
It’s getting harder to make out the shape of the economy through the fog of Trump 2.0’s firings and tariffs. Indeed, one regional Fed bank sees real GDP contracting this quarter, another sees it expanding, and bad weather has distorted signals from several economic indicators. No wonder the stock market’s default position is risk-off and stocks have been correcting. We’ve lost some confidence that the economy will avoid a recession, raising the odds of one to 35%, up from 20%, last week. And we’re wondering whether Trump Tariff Turmoil 2.0 might trigger a rare kind of flash crash unaccompanied by a recession. … Also: Dr Ed reviews “A Complete Unknown” (+ +).
China, Tariffs & Quantum Computing
China’s response to the US’s tariffs on Chinese imports was muted, Jackie reports, involving limited new restrictions and tariffs on certain US goods. China has too weak an economy to risk a bolder retaliation. But the country did announce new economic goals that suggest bold new stimulus spending to help pull its economy up by its bootstraps. … Also: What a few American CEOs in tariff-affected industries have said about the impacts on their companies. … And: Development of ever better quantum computing capabilities is turning out to be a game changer for the big guys—Amazon, Google, and Microsoft—while most startups in the space remain unprofitable.
Trump Turmoil Raises Odds Of A Recession
Trump 2.0’s head-spinning barrage of executives orders, firings, and tariffs have rattled investors, shaken confidence in the economy, and inflamed inflation fears. The pain of these decisive actions is being felt now, while the benefits of his other policies are further off. As a result, we’re revising our subjective odds of two of our three outlooks. We’re not changing the 55% probably assigned to our base-case Roaring 2020s scenario, but we now see less chance of a stock-market meltup/meltdown scenario (10%) and higher odds of a recession and bear market (35%). … Also: Melissa examines why the copper price has been rallying notwithstanding stagnant global economic growth.