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On BOE Decision, Q3 Earnings & Bubble Meter
The Bank of England is walking a tightrope, William explains. The central bank needs to raise its key interest rate this week to rein in inflation and preserve credibility but also needs to temper investors’ aggressive expectations of rate-hiking to come. Pushing rates much higher could reignite gilt market stress and complicate the new PM’s efforts to establish fiscal credibility. The rate move would telegraph three messages about central bank decision-making in the global economic environment. … Also, Joe shares insights from the earnings results of the S&P 500’s September-quarter reporters to date. … And Melissa introduces the new and improved Bubble Meter that she and Claude have built.
Nothing To Fear But Fear Itself And FOMO, FEMO, FOGO & FOJO
I. Three Shades Of Fear Monday's issue of The Wall Street Journal featured a story titled, "Hedge Fund Elliott Warns of FOGO: Fear of Getting Obliterated in the Market." That has inspired us today to coin "FOJO," or fear of jumping out of the market. FOMO, of course, is the fear of missing out on a bull market. Only a few months ago, we felt the need to coin "FEMO," or fabulous earnings momentum to describe this year's earnings-led bull market. FOMO is reflected in the forward price-to-earnings (P/E) multiple, while FEMO is captured by forward earnings per share (E). So far this year, FEMO has been booming, but FOMO has been fading. S&P 500 forward earnings surged 31.3% ytd through November 2, lifting the index 10.2% despite a 13.8% contraction in its forward P/E (chart). Earnings momentum has more than offset multiple contraction. Ironically, one reason FOMO has declined may be FEMO itself. Investors fear that analysts' earnings expectations might be irrationally exuberant. We share that concern. Analysts' consensus S&P 500 operating earnings are currently projected to reach $494 by 2028, well exceeding our $450 forecast and approaching our $500 target for 2030 (chart). Sentiment about the AI trade has shifted from euphoria to skepticism as financial, political, social, and physical constraints on the AI buildout intensify. Investors fear these could slow AI investment and force analysts to lower their exuberant earnings expectations. The market seems to recognize that risk. Despite analysts' soaring long-term earnings growth (LTEG) expectations this year, the S&P 500's forward P/E has declined to 18.1 (chart). Investors are increasingly reluctant to pay up for earnings growth that may prove unsustainable. Doubts about future FEMO are weighing on today's FOMO. (During the 1999 Tech Bubble, the forward P/E rose faster than LTEG.) The good news is that FOJO might now be driving the bull market. While investors are increasingly concerned about the AI trade, they are reluctant to bail out of the stock market. Instead, they are rotating aggressively out of technology and into other sectors. We remain bullish, targeting 7,900 for the S&P 500 by year-end, based on our 2027 EPS forecast of $425 and a forward P/E of 18.6. II. The Roaring Economy Today's economic data clearly illustrate why we remain fundamentally bullish. Despite stock market jitters, the US economy continues to roar. Consider the following: (1) JOLTS. Job openings rose to 7.5 million in September, the highest since May (chart). Total hires rose to 5.4 million, the highest since March. Quits surged to 3.4 million, the highest since March 2025. Layoffs fell to 2.0 million, the lowest since March 2025. The message is clear: More job openings, stronger hiring, rising quits, and fewer layoffs all point to strengthening labor market conditions. Job openings in cyclically sensitive industries are upbeat. Manufacturing openings rose to 584,000 in September, the highest since December 2023, while construction openings have also been trending higher (chart). Both industries are benefiting from the AI infrastructure investment boom. Meanwhile, retail trade openings are trending higher, reflecting strong consumer demand. (2) Consumer spending. With the labor market remaining healthy, it is hardly surprising that consumers continue to spend. Redbook same-store retail sales rose 9.8% y/y during the week of October 30 (chart). (3) Durable goods orders. Durable goods orders rose 1.9% m/m in September. Orders excluding transportation increased 0.5%, while core capital goods orders (nondefense ex-aircraft), a key gauge of business investment, rose 0.6% and 13.7% y/y (charts). The major components of durable goods orders are at record highs (chart). Orders for machinery necessary to operate data centers are especially strong (chart). Meanwhile, unfilled machinery orders climbed to $155.1 billion in September, approaching their all-time high and signaling a robust pipeline of future production (chart). Unfilled orders for computers and electronic products rose to a record $162.4 billion in September (chart). The increase highlights robust demand for AI-related infrastructure.
On China’s Bear Market & North Korea’s Heist
The global AI rout last week hit China’s stocks hard. If China’s AI trade was a bubble that now has burst, William says, President Xi’s push dream of a “Wall Street East” could pop as well. An AI bust would only reinforce households’ perception of Shanghai as a casino, with odds set by the Politburo, thwarting Xi’s push to steer household savings into stocks, particularly tech stocks. … Also: The North Korean government is under investigation for stealing $6 billion in cryptocurrency, the largest crytpo theft to date. The breach exposes crypto’s vulnerabilities and puts China, North Korea’s chief benefactor, in a sticky spot.
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