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US MARKET CALL: History Lesson
The S&P 500 broke out of its summer range this week to yet another record high. The index closed at 7,757.64 on Friday, clearing the 7,500 level it had circled since May 14. The index is 3.5% above its 50-day moving average and 9.8% above its 200-day moving average. Those are not extreme readings. The breakout is a good moment to ask where this bull market fits in the historical record. The answer is that it's in the middle. That is a more bullish finding than it sounds. Bull markets do not die of old age or of accumulated gains. They usually die when earnings roll over. The current bull market has been compared to the dot-com era's meltup/meltdown scenario. If the late 1990s ended with a stock-market meltup, will the late 2020s do the same? Back then, it was a FOMO-driven meltup; everyone feared being left out. This time, FEMO, or fabulous earnings momentum, is the driving force. Here's more: (1) History. In the current bull market, the S&P 500 is up 116.9% since it began on October 12, 2022 (chart). That ranks fifth of the eight bull markets since 1966. Investors who believe this market has run too far should look at what running too far can actually look like. Overlay the current period starting in 2015 on 1985-2005, and the two paths track each other closely, with the current run at 276.8% since 2015 (chart). If the analog continues to hold, the market keeps climbing, and the interesting years are ahead rather than behind. That brings us to the meltup question. Valuation multiples are higher today than they were heading into the Tech Wreck of the late 1990s (chart). So a meltup from here would more likely be an earnings-led meltup than a valuation-led meltup. It would be a FEMO one rather than a FOMO one. (2) Performance. The S&P 500 equal-weight and market-weight indexes both rose to record highs last week (chart). The Impressive 493 is up 16.0% ytd, compared with 13.3% for the S&P 500 and 4.8% for the Mag-7 (chart). The Mag-7 has recovered ground since the hyperscalers reported, closing part of a performance gap that was much wider in June. The Russell 2000 also rose to a record high last week (chart). SmallCaps do not lead when investors are positioning for a recession. (3) Growth vs Value. The S&P 500 Growth and S&P 500 Value indexes both rose to new record highs last week (chart). The forward P/E of S&P 500 Growth has fallen to 20.2, against 18.3 for Value (chart). Investors who worry about a replay of the dot-com episode should note that Growth traded above 40.0 in 2000. The valuation case for that comparison has diminished considerably. Note that Growth's forward earnings recently has been boosted by mark-to-market (MTM) capital gains, thus lowering the forward P/E. (4) Earnings. FEMO continues to drive the bull market. Forward earnings, currently at $389.90 per share, is converging toward the analysts' 2027 EPS consensus (currently at $408.83) as this year progresses (they’ll match by the end of the year) (chart). The latter has been continuing to rise, and so has the 2026 consensus EPS estimate, which has been boosted over the past few weeks by MTM gains. The 2026 quarterly picture is strong across the board starting with Q1's 19.0% y/y (chart). The actual/estimated blended growth rate for Q2-2026 is a whopping 46.7%, up sharply in recent weeks. The current estimates for Q3 and Q4 are 22.6% and 27.0%. The Q2 spike reflects the MTM gains we have flagged for two weeks running. Q3 and Q4 carry no such distortion and continue to rise. The sectors tell the same story, with the same caveat. On a pro forma basis, Q2 growth for the S&P 500 is 51.1%, with Communication Services and Consumer Discretionary both making big upside moves (chart). Alphabet's MTM gains drive the former, and Amazon's MTM gains drive the latter. Information Technology continues to climb firmly at 72.9% without the benefit of MTM gains. Energy and Health Care are the outliers at 142.7% and -6.8%. (5) Sentiment. The Investors Intelligence bull-bear ratio spiked this week to 3.63, well above its 2.60 average (chart). The AAII bull-bear ratio has not followed, at 0.98 against its own average of 1.19. Institutional investors are bullish; retail investors not so much.
ECONOMIC WEEK AHEAD: August 10-14
Last week, July payrolls fell 23,000, missing the 85,000 consensus, even as the unemployment rate edged down to 4.1%. The 2-year Treasury yield fell 7 bps on the release before recovering to close little changed near 4.21%. This week, attention turns to inflation. July CPI (Wed) and PPI (Thu) will be the first hard inflation data since the Fed's meeting two weeks ago. Retail sales close out the week on Friday. “FedSpeak” resumes Thursday with Cleveland Fed President Beth Hammack (a dissenter at the July FOMC meeting) and Richmond Fed President Tom Barkin speaking. The Q2 earnings season still has two weeks to go, with lots of reports from retailers ahead. Overseas, Japan's latest PPI (Wed night EST) will be released amid acute yen stress, the Reserve Bank of Australia (RBA) meets Tuesday, and the UK posts its first Q2 GDP estimate. Here are the key economic releases most likely to influence the financial markets this week: (1) Inflation. This week's inflation prints carry outsized weight heading into the September 16 FOMC meeting, where futures markets currently price roughly a 43% chance of a 25 bps hike, down from 55% before Friday's weak jobs report. The Cleveland Fed Inflation Nowcasting model has July's headline CPI (Wed) rising 0.1% m/m and 3.4% y/y, down from 3.5% in June (chart). The model’s projection for core CPI looks similarly benign, rising 0.2% m/m and 2.5% y/y from 2.6% in June. June's PPI Final Demand rose 5.5% y/y, while the measure excluding trade services ran hotter at 6.1%, and the core measure (also stripping food and energy) firmed to 5.1% (chart). (2) Retail Sales. The release of July retail sales (Fri) follows a June increase of 6.7% y/y (chart). The weekly Redbook same-store sales index has slipped a bit but remains high, easing to 8.2% y/y for the week of July 31 from 10.1% in early July. That pace is still well above trend, confirming that consumer spending has stayed healthy despite slower headline jobs growth. (3) Unemployment Claims. Initial jobless claims for the week ending July 31 rose slightly to 199,000, still below 200,000 for a third straight week, with the four-week average at 198,800, near the lowest since 2022 (chart). Continuing claims held at 1,801,000, with its four-week average at 1,795,000. Both point to a labor market that remains resilient at the margin, even after Friday's weak payrolls print. (4) Global. Japan's July PPI (Wed) follows a rare joint US-Japan intervention to defend the yen, which hit 40-year lows in late July, with the Bank of Japan signaling its most explicit openness yet to an early rate hike. June's PPI jumped to 7.1% y/y, its fastest pace since March 2023 (chart). A hot July print would add pressure on the BOJ to tighten rather than to lean on currency intervention alone to rein in inflation. Elsewhere, the RBA (meeting Tue) is widely expected to hold its key interest rate at 4.35% after the June-quarter trimmed mean inflation rate cooled to 3.6%. Also: The UK posts its first Q2 GDP estimate on Thursday, following Q1 GDP growth of 0.6%.
People Close To Warsh Are Talking About Him
I. The Fed Today's Financial Times ran an exclusive story about Fed Chair Kevin Warsh. It is based on insights provided by unidentified people close to him. They say that he admits that he has made some mistakes, "including failing to reinforce his key messages on price stability." In our opinion, he has been unequivocal about his commitment to restore price stability. He just hasn't done anything about it so far. Nor has he provided any information about the Fed's reaction function under his leadership. The FT article suggests he is watching "market-based measures of inflation," which remain low. Furthermore, the article states, "[b]y breaking the feedback loop between the Fed and investors, the new chair has said that he hopes markets will spend less time scrutinising officials’ clues and focus more on economic data." We've been monitoring the 2-year Treasury yield, which is unambiguously calling for rate hikes. Warsh is refusing to provide any forward guidance, but his people are providing some, saying that he is "prepared to raise interest rates at September’s meeting if inflation readings released in coming weeks are hot." We thought that the Q2-2026 core GDP deflators for total GDP and for personal consumption expenditures were hot at 3.8% y/y and 3.3% (chart). Will Warsh provide any more clarity in his Jackson Hole speech on Friday, August 28. We doubt it. II. Macro The September FOMC rate decision will ultimately hinge on the economic data. The latest reports point to a resilient economy, a tight labor market, and persistent inflation pressures. Consider the following: (1) Productivity. Productivity, measured as nonfarm business output per hour worked, rose 2.2% y/y in Q2, in line with its 2.1% long-term average (chart). We expect productivity growth to improve over the rest of the decade as businesses continue investing heavily in AI and other productivity-enhancing technologies. That should boost economic growth and moderate inflation. For now, AI is boosting inflation, as we have previously discussed. (2) Unit labor costs & inflation. Unit labor costs, measured as hourly compensation divided by productivity, rose just 1.4% y/y in Q2 (chart). This suggests that labor market conditions are not a source of inflation. Instead, inflationary pressures are coming from higher energy prices, tariff-related increases in goods prices, and the economy's ongoing AI-driven investment boom. (3) Corporate profitability. Corporate and S&P 500 profit margins remain near record highs, helping to support surprisingly strong earnings growth (chart). Continued productivity gains should provide further support for profits over the remainder of the decade. (4) Initial unemployment claims. Jobless claims rose slightly to 199,000 in the week ending July 31 but remained below 200,000 for a third consecutive week (charts). Even more encouraging, the four-week moving average fell to its lowest level since October 2022, suggesting that the unemployment rate fell in July. Continuing claims also remain subdued. (5) Layoff announcements. The decline in jobless claims is corroborated by layoff announcements. US employers announced just 33,429 job cuts in July, the lowest monthly total in two years (chart). (6) Job growth. Yesterday, ADP reported that private payrolls rose by 44,000 in July. Today Revelio Labs estimated that nonfarm payrolls increased by 79,200. III. Commodities The war isn't over. This afternoon, Reuters reported, "An attack by Yemen's Houthis on southern Saudi Arabia wounded 11 civilians." An Iranian parliamentary committee is reviewing a preliminary bill that would bar US, Israeli and other "hostile" vessels from transiting the Strait of Hormuz, Iran's semi-official Fars news agency reported, citing a lawmaker. Yet, the price of a barrel of Brent crude oil remains below $84 this evening (chart). Meanwhile, the turmoil in the Middle East doesn't seem to be denting global economic growth, according to the copper price, which rose to a record high today (chart). It looks set to move still higher. IV. Stocks The bull-bear ratios we monitor showed increased bullishness this week (chart). They are not high enough to provide clear signals of an imminent pullback.
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