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Anatomy Of The US Labor Market
Last week’s employment report was widely interpreted as good because jobs growth rebounded and the unemployment rate dropped. Dr Ed and Elias disagree. Our inflation-adjusted Earned Income Proxy fell as inflation surged, a bad sign for real disposable income. The drop in the unemployment rate is good news, of course. Both labor supply and labor demand have contracted in recent months but remain roughly in balance. … Also noteworthy: Retiring Baby Boomers are weighing on real disposable income while simultaneously bolstering consumer spending. … And: Dr Ed reviews “Project Hail Mary” (+).
Read Full AnalysisOil Price Shock Boosts March Prices-Paid PMIs
Tomorrow night at 8:00 p.m. is the deadline by which Iran must accept President Donald Trump's ultimatum to reopen the Strait of Hormuz or face a US attack on its power plants and bridges. There is no way to predict the outcome. We can't rule out that Iran will cave in. Or, Trump may postpone the deadline again, explaining that negotiations are making progress. Or the war will escalate. The fog of war remains thick. Nevertheless, we expect that one way or another, Trump will declare victory in two to three weeks. If so, then the US economy should continue to grow, with a brief period of higher inflation. That's the initial verdict of the March national Purchasing Managers Indexes for both the manufacturing (M-PMI) and non-manufacturing (NM-PMI) sectors of the economy. Consider the following: (1) Inflation in the PMIs. The sum of the prices-paid indexes for the M-PMI and NM-PMI is back to its level at the end of 2022 (charts). It tends to lead both the PPI and CPI inflation rates by about six months. So, both inflation rates are likely to rise in the coming months. (2) M-PMI & the Economy. The manufacturing sector is likely to benefit from defense and energy spending resulting from the war. So it is no surprise to see that M-PMI rose in March to 52.7, the highest level since 2022, marking the third consecutive month of expansion following about three years of readings mostly below 50.0 (chart). Production posted its fifth straight month in expansionary territory, and new orders held comfortably in growth territory for a third consecutive month. Employment stayed in modestly contractionary territory. Inventories remain deep in contractionary territory, suggesting that inventory levels at US manufacturing firms are lean (chart). This has amplified the rebound in the headline M-PMI. That's because low inventory levels, coinciding with an increase in demand, force firms to expand production to meet demand and replenish stocks. The March prices-paid index surged 7.8 points to 78.3%—its highest reading since June 2022. Steel, aluminum, and petroleum-based products contributed to higher costs. No commodity prices were reported to have declined in the M-PMI survey last month. Respondents to the M-PMI survey explicitly cited the war in Iran as a new headwind. Among negative respondent comments, roughly 40% referenced the Middle East conflict and 20% cited tariffs. Overall, 64% of comments were negative—a meaningful deterioration in sentiment even as the headline M-PMI held up. Manufacturing employment contracted for the 30th consecutive month. Fifty-five percent of manufacturing panelists indicated that managing headcount—not adding to it—remains the operating norm, reflecting a prolonged reluctance to hire. (3) NM-PMI & the Economy. The NM-PMI moderated to 54.0% in March, its 21st consecutive month in expansion territory. New orders accelerated to the highest reading since February 2023. Business Activity fell to its lowest reading since September 2025. The biggest downside surprise was the NM-PMI employment index, which fell sharply back into contraction to its lowest reading since December 2023. Panelist commentary highlighted offshoring and cost-cutting, with one respondent noting that lower US headcount was offset by higher employment in low-cost geographies. The NM-PMI prices-paid index surged, mirroring the manufacturing report. The index jumped 7.7 points to 70.7%—its highest reading since October 2022 and the largest single-month increase in more than 13 years—as fuel, energy, labor, and construction materials all moved higher. (4) Employment PMIs. Should we be concerned about the sharp drop in the NM-PMI employment index during March? Not really, since private-sector payroll employment in services rose 143,000 that month (chart). March manufacturing employment rose 15,000 during March, stronger than suggested by the M-PMI employment index.
Read Full AnalysisMARKET CALL: The Tug Of War Between P/E And E
Last Monday saw the S&P 500 down 9.1% from its January 27 high, which we believe marks the trough of the latest pullback, for now. That was our call on Tuesday. The next two days could make or break our call. Today, President Donald Trump issued a final, profanely worded ultimatum, setting a firm deadline for what he is calling "Power Plant Day." He specified on Truth Social that Tuesday will be "Power Plant Day, and Bridge Day, all wrapped up in one." He warned the Iranian regime that they would be "living in Hell" if the blockade of the Strait of Hormuz isn't lifted by 8:00 p.m. Today, Trump also told Israeli media (Channel 12) and the Wall Street Journal that the US is currently engaged in "deep" negotiations and that there is still a "good chance" a deal could be reached before the Tuesday night deadline. Our call of a market bottom doesn't come with a money-back guarantee, of course. However, history offers some reassurance: The S&P 500 has been higher two years after the past four major US military engagements, with gains of 31% to 44% following the Korean War, the Iraq War, the Gulf War, and World War II (chart). We think there is good value in the stock market at current levels. The forward P/E of the S&P 500 peaked last year at 23.0 on October 27 (chart). It fell 17.8% to 18.9 through Monday of last week (chart). Over that same period, S&P 500 forward earnings rose 12.7%, reaching record-high territory (chart). The valuation multiple initially dropped due to concerns about AI companies' profitability, then fell more quickly amid fears that the war would trigger a global recession. However, industry analysts didn't blink and continued to raise their collective earnings outlook. Despite the typical pattern of analysts' estimates drifting lower as the reporting season approaches, their Q1 estimates stayed remarkably steady despite the war, and they have increased their forecasts for Q2-Q4 (chart). S&P 500 forward earnings continues to rise rapidly, while S&P 400 and S&P 600 forward earnings are also moving higher (chart). The broadening breadth of forward earnings in recent months is a bullish development. The wide breadth of forward earnings among the S&P 500 sectors is also bullish (chart). Information Technology continues to lead the way, despite concerns about AI's negative impact on the profitability of companies in this sector. The same applies to Communication Services. The forward earnings of Consumer Discretionary, Consumer Staples, Financials, Industrials, and Utilities are all at record highs. So far, Energy isn't much of a contributor to the bull market in forward earnings! The S&P 500's forward profit margin has continued to rise to a record high of 15.0%, led by IT at 31.4% and supported by a broad-based expansion across sectors. Many of these metrics are also at or near record highs this year, including Financials, Communication Services, Utilities, and Consumer Discretionary (chart). Total forward earnings for the S&P 500 has continued to climb, even excluding the Magnificent-7 (chart). On December 7, 2025, we lowered our rating for the Mag-7 from overweight to underweight. A couple of weeks ago, we moved back to equal-weight (chart). The forward P/E of the Mag-7 is down from 31.2 on November 3, 2025, to 23.7 currently. Energy has re-rated from 15.7 to 19.3 as the market priced in the oil price shock. The more interesting story is Financials at 14.3, down from 16.4, despite carrying the second-highest forward profit margin in the S&P 500 at 21.4%. The de-rating looks overdone if private credit stress proves contained (chart). The IT sector's forward P/E at 20.7 has now converged with the S&P 500's 19.9 (chart). For investors with a multi-year horizon, this is an attractive entry point. The share of the S&P 500’s market capitalization represented by the IT sector plus the Communication Services sector, at 43.6% currently, exceeds the dot-com era’s peak. That’s been the case over the past 12 months or so. But there’s arguably more earnings support for such a high concentration of the market in these two sectors now versus back then. Today, the forward earnings share of the two sectors, at 42.0%, is only 1.6ppts above the market-cap share (chart). At the dot-com peak, the gap between market-cap share and earnings share exceeded 15ppts. Today’s concentration is well deserved. We asked Michael Brush for an update on insiders: "Insiders had turned cautious (in week three of the war) ahead of the declines in the past two weeks. Insiders turned more bullish in the past two weeks as stock prices declined further."
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