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US MARKET CALL: FOMO vs FEMO (Fabulous Earnings Momentum)
The stock market has had an exuberant stretch since the S&P 500 bottomed on March 30. The index is up 17.8% since then through Friday, after hitting a record high on May 14. The DJIA rose to a record high this past Friday. The bears say the exuberance is irrational, driven by lots of excitement about AI. We say it is rational, based on our Buzz Lightyear Theory (BLT) of "To Infinity and Beyond!" According to our BLT, there’s a fourth factor or production, not just the historically recognized three. In addition to land, labor, and capital, which are relatively scarce, there’s now data, the supply of which is unlimited. The Digital Revolution, which began in the 1960s, is all about processing as much information as possible, as quickly as possible and as cheaply as possible. Today's AI technologies can certainly do all that much better than IBM mainframes back in the mid-1960s. Instead of focusing on rational versus irrational exuberance, let's compare FOMO to FEMO. The former stands for “Fear Of Missing Out.” Investors pile into stocks, bidding up their price-to-earnings multiples. FEMO is “Fabulous Earnings Momentum.” Analysts raise their earnings estimates because hard data and company guidance give them reason to do so. We would rather see FEMO than FOMO every time. This year has been all about FEMO. Through Friday, the S&P 500 is up 9.2% ytd, forward earnings is up 14.4%, and the forward P/E is down 4.6% (chart). The entire rally has been driven by forward earnings. The multiple has contracted. FOMO inflates the P/E. This market did the opposite. That is why we are not in the bubble camp. FOMO is based on hope and hype. FEMO is based on fundamentals. At 21.1 times forward earnings, the S&P 500 is not irrationally valued unless a recession is coming in the foreseeable future. We don't see one. Now consider the following: (1) Record forward earnings. The S&P 500's forward EPS rose further to a record $358.82 last week. The 2026 and 2027 consensus earnings estimates are both at new highs of $337.11 and $390.86, respectively (chart). Analysts keep raising their estimates as the AI compute buildout struggles to keep pace with the exploding demand for processing ever more data. Forward earnings is a leading indicator of the actual quarterly earnings of the S&P 500 (chart). We have rarely seen forward earnings rise so quickly at this stage of an earnings cycle. That's FEMO. (2) Record profit margins. Profit margins have been on fire since mid-2023, approximately seven months after ChatGPT was released. The forward profit margin reached a record 15.5% last week, and the current 2027 consensus margin is 16.1%, up from 14.8% currently this year (chart). This is consistent with the productivity gains at the heart of our Roaring 2020s narrative. (3) Broadening earnings breadth. Across the S&P 500, 85.6% of companies report rising forward earnings, and 89.0% report rising forward revenues, both on a y/y basis (chart). That's more FEMO. (4) Mag-7 vs Impressive 493. FEMO has been led by the Mag-7 since ChatGPT was released in late 2022. Their combined forward earnings has increased sharply since mid-2023 (chart). There is one caveat: A few of these companies booked mark-to-market gains on their AI investments in Q1-2026, which boosted reported earnings. Strip those out, and the underlying growth rate remains solid. Meanwhile, the forward earnings of the Impressive 493 has also been rising faster in recent months, to record-high territory. (5) FEMO and LTEG. Fabulous Earnings Momentum has been driven by the rising consensus of long-term earnings growth (LTEG) expectations of industry analysts. Information Technology alone is the biggest contributor to the S&P 500's LTEG. It is the only sector above the S&P 500's LTEG, at 34.9% versus the index's 21.9% (chart). That 34.9% is a record high, above its dot-com peak (chart). Information Technology's growth expectations may be bordering on irrational, and we flag it. But this is analysts raising LTEG, not investors bidding up stock prices. Optimistic earnings forecasts get revised. They do not crash the market the way that a stretched valuation multiple can. (6) Valuation and FOMO. The multiple is where FOMO resides, but it is nowhere to be found. The S&P 500 trades at 21.1 times forward earnings per share, and the Information Technology sector at 24.4 (chart). In 2000, the multiple ran up while earnings lagged behind. This year, it is the reverse: Earnings is doing the running, and the multiple has backtracked. That is the better setup. That is FEMO, not FOMO. (7) Case study. Semiconductors make the case. The industry's share of Information Technology's forward earnings has risen to 46.9%, only slightly above its 45.1% share of the sector's market cap (chart). The market is signaling that semiconductor makers are growth companies, not the cyclicals they once were. That conviction would normally inflate their stocks’ P/E multiples. It hasn't. The rally in the semis has been led by E, not P/E. That is FEMO, not FOMO.
ECONOMIC WEEK AHEAD: May 25-29
The US financial markets are closed on Monday for Memorial Day, and the holiday-shortened week is light on economic data releases. On Thursday, the second estimate of Q1-2026 GDP will be reported alongside April's core PCED, the Fed's preferred inflation gauge. Eight Fed officials speak over the week. With little fresh data to help investors gauge whether the FOMC is turning more hawkish, they’ll be parsing the speakers’ commentary for signs. The markets now reflect a 62.5% chance of a rate hike this year, arriving in December, up from 50.0% a week ago. We think one could come as early as July. The wild card is whether President Donald Trump's latest "likely negotiated" peace deal is the real deal. On Saturday, he said that it would reopen the Strait of Hormuz. The deal under discussion includes a memorandum of understanding as a first phase, Iran’s foreign ministry said Saturday, with broader talks to follow within 30 to 60 days. The two sides remain far apart on key issues. Globally, bond yields backed off this week’s highs but stayed elevated. The 10-year US Treasury yield eased to 4.56% from a 4.69% peak, and the UK 10-year gilt slipped to 4.90% from 5.19% (chart). Here are the key economic releases most likely to shape investors’ thinking this week: (1) GDP. Thursday's second estimate of Q1-2026 GDP should hold near the 2.0% advance reading. The Atlanta Fed's GDPNow model already has Q2 tracking 4.3%, led by a surge in business equipment spending (chart). (2) Core PCED. April's core PCED, the Fed's preferred inflation gauge, arrives Thursday. It ran at 3.2% y/y in March, up from 3.0% in February, with headline inflation at 3.5% (chart). Given that the latest CPI and PPI both ran hot, the risk is another upside surprise that further strengthens the case for a Fed rate hike. (3) Consumer confidence. May's Consumer Confidence Index survey (Tue) should tick higher from April's 92.8 (chart). We will focus on the labor market indicators, which are likely to show some improvement. (4) Unemployment. Initial jobless claims (Thu) came in at 209,000, with the four-week moving average at 202,500 (chart). Continuing claims were 1,782,000, with the four-week moving average at 1,778,000. The labor market continues to improve. (5) Regional business surveys. The week's regional Fed business surveys include Dallas (Tue) and Richmond (Wed). Both the ISM national M-PMI and the regional average of the five Fed surveys have turned higher in recent months (chart). The recovery in manufacturing is broadening. The regional prices-paid average has climbed back to 54.9, and PPI final demand is already running at 6.0% y/y (chart).
Mindboggling: Quantum Computing + AI + Resilient Economy
The Department of Commerce signed letters of intent to invest $2 billion in federal incentives under the CHIPS and Science Act across nine quantum computing and hardware companies. Rather than issuing traditional research grants, the Trump administration is taking minority equity stakes in these companies in exchange for the capital, continuing a broader policy shift toward direct government ownership in strategically critical sectors (similar to previous moves with Intel and rare-earth mining). Publicly traded quantum stocks experienced immediate and intense price surges today following the announcement (chart). This is government-financed exuberance about the future of quantum computing. The question is whether it is rational or irrational exuberance. We are in the rational exuberance camp. Just imagine the combination of quantum computing and AI. This is all consistent with our Buzz Lightyear Theory: "To Infinity and Beyond." Then again, exuberance may be turning a wee bit irrational. S&P 500 consensus expected long-term earnings growth (LTEG) soared to 21.9% during the week of May 21 (chart). That's the highest reading on record, except during the pandemic period. On the other hand, our two favorite Bull-Bear Ratios remain relatively subdued, suggesting that a serious stock market pullback isn't likely for now (chart). Furthermore, our friend Michael Brush reports: "Last week, the week ending May 15, actual insiders purchased an enormous $224 million worth of stock. Granted, insider buying bounces around quite a bit week to week. But this is so high above the pre-war weekly average of $86 million, it is a meaningfully bullish signal." The latest batch of economic indicators confirms our forecast that economic growth will improve during Q2, following weather-related lackluster growth during the previous two quarters: (1) GDP indicators. The Citigroup Economic Surprise Index is solidly in positive territory (chart). That's because recent economic indicators have been stronger than expected. The New York Fed's weekly economic index is showing that real GDP is growing 3.0% y/y as of the week of May 15 (chart). The latest Atlanta Fed GDPNow estimate for Q2-2026 is 4.3% q/q saar (chart). Capital spending is leading the way. Consumer spending is up solidly at 2.9%. (2) Labor market. Initial jobless claims fell to 209,000 for the week ending May 16, with the four-week moving average dropping to 202,500, its lowest level since January 2024. Continuing claims ticked up slightly to 1,782,000, but the four-week moving average fell to 1,773,000, its lowest since January 2020, indicating it has become easier for unemployed workers to find new jobs (chart). The moderation in initial jobless claims suggests the unemployment rate likely fell in May (chart). (3) Flash PMIs. The S&P Global M-PMI rose to 55.3 in May from 54.5 in April, its highest reading since May 2022, marking continuous improvement since last August. Output rose at the fastest pace in just over four years, payrolls posted their largest increase in 11 months, input costs posted their largest monthly increase since June 2022, and selling prices posted their highest level since September 2022. The S&P Global NM-PMI eased from 51.0 in April to 50.9 in May, with energy cost increases pushing service costs to a one-year high, selling price inflation accelerating to a 10-month high, service exports falling at the sharpest rate in six years, and sector jobs cut at the second-fastest pace since May 2020. (4) Regional business surveys. The average of the three available Fed business surveys moderated in May but remained close to a 4-year high, confirming the strong reading in the S&P Global Manufacturing M-PMI and suggesting that the ISM M-PMI will also point to a strong manufacturing sector in May. (5) Consumer spending. The Bank of America consumer checkpoint survey offered a constructive read. Headline card spending rose 4.8% y/y in April, the strongest monthly growth in three years, and even stripping out the gasoline price boost, spending still rose 4.0% y/y, confirming solid underlying demand. Restaurant and travel transactions both increased y/y, suggesting that spending on discretionary services is growing. Meanwhile, Target reported 4.4% customer traffic growth and comparable sales up 5.6% for Q1-2026, its strongest since early 2022. Target's new CEO, Michael Fiddelke, observed that the company saw "broad-based consumer strength." Walmart posted solid 7.3% y/y revenue growth, but its stock fell over 7% on weak guidance, with its CFO noting that higher-income households are spending confidently, while lower-income households are "navigating financial distress."
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