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On US Profits, Consumers & Inflation
With the US economy producing record-breaking earnings and margins, Dr Ed and Elias wouldn’t be surprised to see employment pick up despite AI adoption and other factors holding it back. … They also expect consumer spending to remain resiliently robust even though income growth isn’t keeping up, which is depressing the saving rate. But not even a negative saving rate—which may occur—would tank consumer spending in today’s environment, they maintain. The spending of retired Baby Boomers would keep it afloat. … Also: CPI inflation historically runs higher than PCED inflation; lately, the reverse is true. That’s mostly because rent inflation, which is moderating rapidly, carries more weight in the CPI.
Read Full AnalysisMARKET CALL: Yogi Was Right: 'The War Ain't Over Till It's Over'
In his seminal work, On War (1832), Carl von Clausewitz famously wrote: "War is the continuation of politics by other means." The US and Iran agreed to a ceasefire in their war and to talks seeking a diplomatic solution. However, their talks failed, and now they are both resuming the war. On Sunday, US Central Command said the Navy will blockade all maritime traffic entering and exiting Iranian ports on Monday at 10 a.m. ET. The markets reacted swiftly on Sunday: The prices of Brent and WTI crude oil jumped by about $8 a barrel each, putting them a bit north of $100. The dollar firmed slightly. Gold fell about $100 an ounce. Futures prices for the DJIA/S&P 500/Nasdaq fell a little over 1%. The financial markets may be learning to live with the war in the Middle East, as they have with the war between Ukraine and Russia. China imports lots of Iranian oil. The White House clearly is leaning on China to pressure Iran to end the war, and also threatened today to impose a 50% tariff on China if Beijing sends advanced defense equipment to Tehran. President Donald Trump offered to facilitate the sale of cheaper oil from Venezuela to China. The unusual negative spread between the Brent and WTI prices suggests that traders believe that foreign demand for US crude oil is increasing as an alternative to oil supplied by Arabian Gulf producers (chart). Notwithstanding the ongoing war, we are sticking with our call that the S&P 500 bottomed on March 30 (chart). We are sticking with our year-end target of 7700 for the S&P 500. The recent outperformance of the Magnificent-7 stocks relative to the Impressive-493 suggests that their valuation multiples fell enough during the recent stock market pullback to attract buyers again (chart). It may also be a sign that investors are less concerned about an AI bubble. We agree with them. In early December of last year, we recommended underweighting the Mag-7. Three weeks ago, we suggested they were cheap enough to raise to market-weight. The Q1 earnings season is starting this week. After rising for several weeks, the analysts' consensus estimates for 2026 and 2027 S&P 500 operating earnings per share have flattened out over the past two weeks (chart). The S&P 500 forward earnings rose to yet another record high during the week of April 9. At Friday's close of 6816.89, the S&P 500 is trading at a 19.1 forward P/E. Industry analysts are very optimistic about earnings growth this year, with their expectations of double-digit gains for all four quarters (chart). They may be a bit too optimistic. During the stock market pullback, Value outperformed Growth (chart). Since March 30, when the stock market bottomed, Growth has outperformed. Interestingly, so have the Transportation stocks. The S&P 500 equal-weighted index has underperformed. We think it will outperform the S&P 500 market-weight index over the rest of this year. Our pivot from Stay Home to Go Global late last year worked well until the war started. However, it has made a comeback since the market bottomed on March 30 (chart).
Read Full AnalysisECONOMIC WEEK AHEAD: April 13-17
The unresolved Middle East conflict will remain center stage this week. It is having an immediate impact on energy prices in the United States. The US blockade of the Strait of Hormuz will push prices up again at the start of the week. The impact on the US inflation pipeline remains the dominant macroeconomic theme, ahead of Tuesday's March PPI release. A relatively quiet week on the economic data front means attention will also fall heavily on the Talking Fed Heads, including Barr, Barkin, Collins, Goolsbee, Bowman, Williams, and Waller, as the blackout period for public speaking approaches. ECB President Lagarde speaks on Tuesday and BoE Governor Bailey on Wednesday, adding an international dimension to the central bank narrative. Here are the key US economic releases most likely to shape investors' thinking on inflation, the labor market, and business activity this week: (1) PPI. The March PPI report (Tue) will show that the headline and core inflation rates of this measure of producer prices heated up significantly last month. They were already heating up during February before the war started (chart). Both are likely to rise to 4.0% y/y. The ISM prices-paid indexes rose sharply in March, indicating that inflationary pressures on the PPI will build over the next six months (chart). (2) Unemployment. Initial jobless claims (Thu) ticked up to 219,000 for the week of April 3, with the four-week moving average rising to 209,500, its first uptick in several weeks (chart). Continuing claims fell to 1,794,000, with the trajectory suggesting that the duration of unemployment may be shortening (chart). This week's data are likely to confirm that the labor market remains resilient; the energy shock has yet to hit it. (3) Industrial production. Industrial production (Wed) stood at 102.6 in February, with manufacturing at 97.6, still below their pre-pandemic highs (chart). However, both have been trending higher since early 2025 while manufacturing hours worked have been relatively flat, suggesting that productivity is growing. We expect more of the same in March, with strong gains in output of information technology hardware and defense. (4) Business & regional surveys. April's regional Fed surveys will be the first forward-looking reads on business conditions since the war started, with the NY Fed (Wed) and Philly Fed (Thu) surveys due. Both tend to be very volatile (chart). The March NFIB Small Business survey (Tue) will offer insights on how small businesses are responding to the war. The NFIB Optimism Index stood at 98.8 in February, just above its long-run average of 97.9 (chart). It dropped sharply during the energy shock in 2022. It is likely to do so again. We will also be watching the labor market indicators in the NFIB survey for indications that the war is depressing hiring plans (chart).
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