Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Anatomy Of Full Employment
When others saw labor market weakening last summer, we saw normalization from the settling down of pandemic-period churn. Our labor market outlook remains constructive. The growth of the labor force should continue to slow, but demand for workers will remain strong, keeping the labor market needle at full employment. Strong productivity gains from widespread AI adoption and a full-employment labor market should spur robust real wage growth. Strong wage growth should keep consumer spending growth and GDP growth strong. All this should keep our Roaring 2020s economic scenario on track. Indeed, January’s labor market data confirm every aspect of our outlook. ... Also: Dr Ed reviews “Mothers’ Instinct” (++).
Palantir, Semis &Tesla’s Big Year
Nvidia remains king of the AI play, but another AI company has been turning investors’ heads: Palantir. This government supplier has also been saving corporate America much time and money with its AI software solutions. Jackie recaps takeaways from the company’s recent conference call, including insights about the commoditization of LLMs, competitive threats from China, and the opportunity that is DOGE. … Also: Semiconductor chip makers reported mixed December-quarter results. … And: Tesla plans impressive product launches in the areas of autonomous vehicles, electric trucks, and humanoid robots. But the humanoid competitive playing field is crowded.
Investing Outside The Mag-7
We continue to recommend overweighting the US stock market in global portfolios. While valuations might be lower in foreign markets, Eric explains, we don’t see enough economic justification to abandon our Stay Home stance for a Go Global one. Within the US stock market, we like large caps, particularly S&P 493 companies, which should expand profit margins as they adopt productivity-boosting technologies. If volatile macro news provides opportunities to buy underappreciated Value stocks on dips, be sure those dips aren’t traps. … Also: Joe reports that among Q4 reporters to date, Financials sector firms have outperformed on several metrics. He also updates us on analysts’ estimate revisions trends.
Trump’s Tariffs: The Art Of The Deal
Trump’s tariffs are about much more than money. They support his agenda to reshape America’s relations with each of the affected nations to the exclusive benefit of the US, Melissa explains. The vision of this consummate dealmaker amounts to no less than a realignment of global trade in support of America’s national security and economic interests. … We’re not worried that the tariffs will spark an upward inflationary spiral; Eric walks through the reasons. If the tariffs were to trigger a global trade war, its effects could slow US economic growth; but that’s not our base-case outlook.
Anatomy Of Gross National Product
Why is the US economy so strong? Look in the mirror: The consumer is the engine of growth. Yes, technological advancements will continue to buoy GDP, as will Trump 2.0 deregulation and lower taxes. But consumer spending accounts for nearly 70% of real GDP. We reject the notion that consumer spending will slow in the face of depleted saving and other drags; it’s too resilient, which is why the economy is so resilient. Likewise, we don’t expect capital spending to slow notwithstanding a weak Q4; companies still have much to gain from investments in AI and other technological innovations. That’s the linchpin of our productivity-led Roaring 2020s outlook (55% odds) and higher S&P 500 price targets for the rest of the decade. ... Also: Dr Ed reviews “Woman of the Hour” (+).
Transports, Insurance& More AI
The S&P 500 Transportation Composite has been on the move this year, Jackie reports, especially its Airlines and Railroad components. Airline traffic is up to pre-pandemic highs for the big players, and so are their earnings and stock prices. Budget airlines aren’t faring as well. Rail loadings are up, though the S&P 500 Rail Transportation index isn’t yet reflecting the strength analysts see in revenues and earnings this year and next. … Also: Insurers exposed to the California wildfires are fuming over the state’s market interventions, but the share prices of two rose after managements’ Q4 earnings calls. … And: Is DeepSeek a mouthpiece for the Chinese Communist Party?
On Eurozone Stocks, BOJ Policy& More On AI Stocks
Eurozone stock markets have been performing well and sport much lower valuations than the US stock market. But their valuations are lower partly for index composition reasons, Eric explains, and we still have plenty of economic and political concerns about the region. So we don’t recommend rotating into Eurozone stocks, preferring our Stay Home investment stance. … Also: Melissa discusses the markets’ reactions to the Bank of Japan’s recent rate hike and the likely path of Japanese interest rates looking ahead. … And: Now that DeepSeek has rocked the world of AI and taken a chunk out of the Magnificent-7’s collective valuation, Joe asks: Is it time for the S&P 493 and the Equal-Weight S&P 500 to shine?
Gray Swan
Chinese firm DeepSeek has taken the evolution of AI to a new level with its cheaper Language Learning Model. As investors scramble to digest the ramifications for stakeholders in US-made AI, Ed and Eric share their perspective. It’s not a Black Swan event but a Gray Swan, holding potential positives and negatives. Although it disrupts the AI status quo, it should speed the proliferation of AI and the realization of associated productivity gains. … Also: The stock market’s historically high valuation doesn’t worry us. Even if the Mag-7’s P/Es take a hit owing to DeepSeek, we expect that the P/Es of the S&P 493 could go higher. Earnings growth should support valuations. … And: How DeepSeek might affect the Fed’s thinking.
Anatomy Of The Bull Market (Will DeepSeek Sink It?)
The current bull market has been driven mostly by valuation expansion; now valuation is historically high. We expect earnings growth to perpetuate the bull market this year; any more valuation expansion could leave the market vulnerable to a meltdown. Our year-end target for the S&P 500 is 7000, based on a solid rise in earnings with no further valuation expansion. … Much of our optimism rests on the Magnificent-7 remaining magnificent. If they don’t disappoint investors, the S&P 500 likely won’t either given their hefty collective share of the index’s market capitalization. … However, a competitive threat to their magnificence has emerged from China: DeepSeek, with reportedly cheaper AI. Could DeepSeek deep-six the Mag-7? ... Also: Dr Ed reviews “American Primeval” (++).
Trump Makes His Mark& China’s AI Players
Trump’s flurry of executive orders on his first day in office upended the playing fields for various industries in a bunch of fell swoops. Jackie reports on the winners and losers and discusses what the changes will mean for corporate America as regulatory roadblocks disappear, trade policy is overhauled, and federal agencies operate under new rules. Energy policy will now favor oil and gas over green fuels, and government efficiency efforts will benefit high-tech players. … In our Disruptive Technologies segment, a look at China’s AI ambitions and the Chinese competitors that US players are up against.
On Trump 2.0, Global Growth, Argentina & S&P 500 Profit Margins
It’s evident how much policy uncertainty is baked into the dollar’s value from its whipsawing during the first two days of Trump 2.0 in reaction to changed expectations regarding the timing of the new tariffs. Despite concerns of higher prices and a trade war, there's the potential for tariffs to expand manufacturing capacity, which would be disinflationary. … Also: Melissa shares highlights from the IMF’s new global GDP growth projections and discusses why we think the Argentinian stock market is one to watch. … And: Joe recaps data on S&P 500 companies’ forward profit margins, which have been on the rise across most sectors.
Time To Recalibrate Our Three Scenarios?
Expectations for more rate cuts this year than previously expected buoyed both bond and stock markets last week. The prior week was bad for both markets as rate-cut expectations diminished. But last Thursday’s comments by Fed Governor Waller that fueled the turnaround were wrong-headed, in our opinion. If inflation follows the course he expects down to 2.0%, the Fed’s dual mandate would be achieved so it wouldn’t need to ease further. … Upon reassessing our subjective probabilities for three alternative outlooks for the economy and markets, we’re sitting pat. Our base-case scenario (55% chance) remains the Roaring 2020s. … Supporting that scenario: Baby Boomers flush with wealth and spending it. … Dr Ed reviews “Nowhere Special” (+).
California Insurance & Big Bank Earnings
Southern California’s devastating wildfires couldn’t have hit at a worse time. The regional insurance market has been in a dysfunctional state of flux, as some insurers have fled the risky market, others have hiked premiums to account for the risk, and many homeowners have opted to go un- or under-insured as a result. Jackie surveys the damages and what they’ll mean for insurers and residents. … She also recaps takeaways from the big banks’ strong Q4 earnings reports yesterday—an auspicious start to what should be a great earnings season.
Updates On China, The UK & Earnings
China gargantuan trade surplus won’t shrink until policymakers stimulate domestic demand. Yuan depreciation now risks capital flight. … In the UK, gilt yields have reached multi-year highs, raising the government’s borrowing costs to levels that might jeopardize its borrowing plans. … Joe has good news for US investors: If the upcoming Q4 earnings season follows the historical pattern, analysts’ already lofty earnings estimates are too low. Joe thinks S&P 500 companies could turn in aggregate y/y earnings growth as steep as 12%.
Fed’s Switcheroos At FOMC & QT
Is this year’s rotation of voting members on the FOMC likely to shift the monetary policy needle? Which way? Today, Eric identifies the new hawks and doves and speculates about how they might vote at January’s meeting. … Also: Although the Fed has been easing monetary policy, its quantitative tightening continues. Yet bank reserves remain elevated notwithstanding the Fed’s balance-sheet runoff. QT may not be terminated until bank reserves fall enough to increase short-term interest rates or until higher long-term bond yields put undue pressure on the economy.
The Recession Is Over, Again!
The financial markets have been recalibrating their expectations for monetary policy since the FOMC’s December meeting and their expectations for economic changes under the incoming Trump 2.0 administration since Election Day. In this context, Friday’s strong employment report only served to cement investors’ sense that the Fed should pause its easing. Both bond and stock markets reacted like the sky was falling. We’re not surprised by this January correction, and we view it as healthy: The markets are gaining a more realistic sense of the current situation, recognizing that interest rates will stay higher (i.e., normal) for longer, while the economy remains resilient. A strong Q4 earnings season should help to restore shaken investors’ confidence. ... Also: Dr. Ed pans “The Substance” (- – -).
AI, Metals & Solar
Today, Jackie recaps takeaways from this week’s Consumer Electronics Show—including Nvidia CEO Jensen Huang’s insights about the future of artificial intelligence and the most notable of the many AI-enhanced high-tech gadgets unveiled at the convention. … Also: Industrial metals appear to be a shiny new investment theme for the new year; their prices have started the year on a positive note for several reasons. … And in our Disruptive Technologies segment, researchers have developed more ways to catch rays for solar power on the go.
Updating Global Economy & S&P 500 Earnings
Today, Melissa takes us on a world tour, reviewing the takeaways from the latest economic releases of major economies. Those in Europe are a mixed bag, with the tourist economies of Spain and Italy looking good as Germany struggles. In Asia, the fast-growing Indian economy stands head and shoulders above the rest, though Japan’s is improving. The “ABC” commodities exporting economies—Australia, Brazil, and Canda—are underperforming for country-specific reasons. … Also: Joe reviews how several S&P indexes performed last year on the fundamental measures of forward revenues, earnings, and profit margins, and he shares takeaways from his new breadth data for the S&P’s three market-capitalization indexes.
Labor Market Remains In Good Shape
Our conviction in the labor market’s continued health wasn’t shaken by the increase in unemployment that triggered the Sahm Rule a few months ago. Today, Eric explains why we dismissed this signal and why we expect revised BLS data next month to show payroll employment at another record high. A greater influx of immigrants than the Census Bureau initially realized has boosted labor market participation, which boosted unemployment. … High rates of immigration have supported GDP growth by increasing aggregate hours worked along with the productivity growth boom now underway. We expect the productivity boom to continue, playing a big role in our Roaring 2020s scenario, with its main driver being the widespread adoption of new technologies as immigration slows.
Risks & Reward In 2025
The January Barometer and January Effect have been interesting statistical regularities that may not have much investment usefulness. It’s better to stay in the stock market whatever the month brings than to try and execute exits and entrances based on the calendar. Over time, the market has a bullish bias, which is why we do too. … Today, Dr Ed lists what could go right for the stock market this year—including better-than-expected earnings, technological advances, and a strong economy buoyed by consumer spending—and what could go wrong. On that list, inspired by the worries of more bearish prognosticators, are the known unknown economic effects of Trump 2.0 policies and how the bond market may respond to them. … Dr Ed reviews “Blitz” (+).
AI, Earnings & More AI
Twenty-twenty-four no doubt will be remembered by equities investors as the year that everything AI-related trounced everything not. Jackie has the striking performance data to prove it. … Also: For some of the fastest-growing S&P 500 sectors this year, earnings could decelerate sharply in 2025 if analysts’ estimates pan out. … And: Websites breathed life into the Internet and apps into the iPhone. Now AI has opened the floodgates to the development of AI-infused apps that can expedite everything from creative endeavors to routine tasks.
Three Challenged Central Banks
Europe, Japan, and China all face economic challenges that monetary policy could help address, but none of their central banks seems ready to deploy the monetary firepower at their disposal, Melissa and Eric report. In Europe, the ECB’s recent rate cut was too small to move the economic revival needle, and the ECB chief wants fiscal policymakers to step up. In Japan, the BOJ is in a watching-and-waiting mode before hiking rates again after its first rate hike touched off a carry-trade ruckus. In China, the government seems unlikely to resort to aggressive rate cutting to stimulate the consumer sector, pinning its hopes instead on fiscal policy and central bank asset purchases.
Thinking About 2025
We’re no longer the most bullish strategists on the block. We project a 15% advance in the S&P 500 next year, whereas others see reason to expect 20%. With bullishness abounding, contrarian indicators are flashing red, and we see the potential for a market correction early next year. Today, Eric details YRI’s positions on the economic outlook, which is supported by brisk consumer and corporate spending and rising productivity growth; the inflation outlook, which is looking sticky above the Fed’s target; what the Fed is likely to do next; and the valuation and fundamentals assumptions that underpin our stock market forecast.
Inflation: The Good, The Bad & The Ugly
Lots of crosscurrents are converging to determine the course of inflation in 2025. So projecting that course takes seeing where those currents are headed, predicting with the aid of historical correlations how they’ll likely impact inflation, then overlaying potential economic scenarios to see how they change the narrative. The result: Dr Ed’s three inflation scenarios—the Good, the Bad, and the Ugly. In the Good, rising productivity growth moderates inflation even as it spurs economic growth; that’s the crux of our Roaring 2020s economic scenario and is the most likely scenario to play out. The Bad is a witches’ brew of possibilities with bearish inflationary consequences. The Ugly involves a geopolitical crisis catapulting oil prices. That ’70s show seems farfetched these days. ... Also: Dr Ed reviews “Maria” (+).
China, Retail & Hydrogen
China has been getting back at the US for imposing sanctions by targeting easy marks: US companies that do business there. Jackie discusses the tit-for-tat cold war that’s not likely to end soon and the companies, like Nvidia and PVH, caught in the middle. … Also: Two retailers catering to consumers at different ends of the income spectrum both reported underwhelming spending among US consumers last quarter. … And in our Disruptive Technologies segment: Hydrogen holds promise as an important new source of green energy, but realizing that promise has been a long, slow slog.