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US MARKET CALL: More Fabulous Earnings Momentum
The Fed might or might not raise the federal funds rate this month. The war in the Middle East may or may not be over (and isn't even a war anymore, says VP JD Vance). A debt crisis may be imminent, or not. The Republicans will probably lose the House in the midterms, or maybe not. Putin may or may not invade NATO. Trump might embargo US trade with countries with a trade surplus with the US, or whatever. Meanwhile, there's no doubt that corporate earnings are soaring. Fabulous Earnings Momentum (FEMO) is driving the market higher despite all the uncertainties listed above. I. Earnings During Q2, S&P 500 earnings per share rose a whopping 50.7%, up from 19.0% during Q1 (chart). Analysts now project 23.6% for Q3 and 27.9% for Q4. Q2 includes the mark-to-market (MTM) gains we have flagged for several weeks. Without them, the Q2 gain was about 25%. The back-half earnings estimates exclude MTM gains, and the Q3 and Q4 estimates are still rising. Forward earnings rose to a record $401.75 per share last week (chart). It is converging toward the year-end consensus estimate for 2027, which just jumped to $418.76, exceeding the $415.00 we set as our year-end target for both series. We are sticking with our 8,400 S&P 500 year-end target for now. We might have to raise our S&P 500 target, which is the highest on the Street, if the 2027 estimate continues to rise (chart)! S&P 500 forward revenues per share is at a record high (chart). This suggests that the global economy is performing well since roughly 40% of S&P 500 revenues come from abroad. Rising revenues and even faster-rising earnings mean widening profit margins. The forward profit margin is 16.6%, and the 2027 consensus margin is 16.8% (chart). Both continue to hit record highs. The strength in earnings is broad-based. Some 88.3% of S&P 500 companies currently have positive 12-month changes in forward revenues, and 85.9% have positive changes in forward earnings (chart). It is not just a LargeCap story, either. Forward earnings for the S&P 500, S&P 400, and S&P 600 all are rising to record highs together (chart). II. Valuation While earnings are soaring, valuation multiples are contracting. The S&P 500 forward P/E is 19.2, with the S&P 400 at 15.8 and the S&P 600 at 15.1 (chart). All three are down in recent weeks. FEMO isn't being matched by fear of missing out (FOMO). As a result, investors are getting more earnings per dollar than they were at the start of the year. The PEG ratio tells the same story. It has fallen to 0.75, the lowest reading of its 30-year history (chart). Investors are skeptical of industry analysts' heady earnings expectations. Compare that with 1999. Then, investors bid multiples to extremes that long-term earnings growth (LTEG) expectations never justified. Now the reverse holds. Analysts' LTEG estimate is 26.0%, while the forward P/E has declined so far this year (chart). Analysts are exuberant. Investors are not. III. Performance The Magnificent-7 had a good week, with the MAGS ETF up 1.3% while the S&P 500 Ex-Magnificent-7 ETF fell 0.7%. The year still belongs to the Impressive 493. XMAGS is up 15.2% ytd against 12.8% for the S&P 500 and 5.3% for MAGS (chart). The bull market has broadened as we expected. IV. Bonds The 10-year Treasury yield is 4.77% and has been trending higher since the spring (chart). It remains inside the 4.00%-5.00% "old normal" range we have argued is the right one for this business cycle. The yield is now pressing against its January 2025 high of 4.81%. A move above that would likely test 5.00%. We would view that level as attractive rather than alarming.
GLOBAL MARKETS CALL: Still A Worldwide Bull Market
Stock prices continue to rise worldwide. A run of central bank meetings over the coming weeks will test whether equity composure holds. Bond yields are also rising worldwide. The question is whether that reflects better-than-expected economic growth, higher-than-expected inflation, and/or looming fiscal debt crises. Equities are voting for growth. We are too. Here's more: I. Global Stock Markets The US-to-Developed World ex-US MSCI ratios have gone flat since early 2025 after climbing for 15 years (chart). They've had matching gains. The US-to-EM MSCI ratios have turned up in recent weeks, though both remain well below their 2024 highs (chart). Emerging markets did the heavy lifting for Go Global through the first half of the year and gave some of it back in July. The turn suggests that gap is starting to close again. September has a ways to go. But so far, Brazil leads the country ETF rankings at 5.1% mtd in dollar terms, with South Korea at 4.4% and Taiwan at 3.8% (chart). The US is towards the bottom at 0.4%. Last week was a good one for Go Global. The ACWX ETF and PBUS have tracked one another closely since Liberation Day last year (chart). A global bull market running that evenly across US and overseas equities for well over a year is remarkable. The spreads between the major overseas equity ETFs and the US ETF have been mixed since early 2025, when Go Global started outperforming (or at least keeping up) with Stay Home. Japan and EMs have outperformed the US. The Eurozone has fizzled. The UK continues to lag (chart). II. Earnings & Valuation The US MSCI trades at a 19.8 forward P/E against 13.1 for the All Country World ex-US (chart). Both have fallen this year, as earnings gains outpaced stock price increases. All Country World ex-US forward EPS keeps climbing, with the consensus stepping up from 2025 to 2026 to 2027 (chart). The stair-step from 2026 to 2027 is steep, and the forward series continues to climb to record highs. The Developed World ex-US series shows the same pattern (chart). Emerging markets are the steepest of the three (chart). South Korea and Taiwan account for most of the strength. Korea's 2026 consensus earnings growth estimate has risen to 333.9% and Taiwan's to 56.9%. III. Global Bonds Yields are rising nearly everywhere. The UK’s 10-year government bond is at a 5.14% yield, the US’s at 4.78%, France’s at 4.19%, Germany’s at 3.34%, and Japan’s at 2.91% (chart). China is the exception, with its 10-year government bond yield at just 1.68% and continuing to decline. For years after the Great Financial Crisis of 2008, government bond yields ran far below nominal GDP growth; that era is over. Yields have converged with nominal GDP growth across the major economies, and they now exceed it in France and the UK (chart). IV. Currencies The dollar is holding up well. The DXY is at 99.2 and remains inside the uptrend channel that has contained it since 2011 (chart). The de-dollarization argument comes back every time the dollar softens. It has yet to show up in DXY. The yen strengthened materially over the past week as traders repriced not only the timing of Japanese tightening but its pace (chart). The won is at its strongest in more than a year (chart). Korean exporters have been converting dollar receipts into won against a large trade surplus, with proceeds from a major US listing adding to the inflow. V. Commodities Commodity prices are turning into a source of inflation. Rising grain prices may soon show up in food inflation worldwide (chart). Diesel is a key input for industrials and transport names. Spot prices have been rising sharply in recent weeks (chart).
A Goldilocks Jobs Report Just In Time For Labor Day
The August US jobs report is among the best we have seen in some time and provided an uplifting backdrop for the Labor Day weekend. Labor demand is solid and becoming more broad-based, unemployment remains low, and labor supply improved in August. At the same time, moderate wage growth and solid productivity gains show that inflationary pressures are subdued in the labor market.In other words, the report reinforces our view that the Fed has little reason to worry about the employment side of its dual mandate. It leaves Fed policymakers free to focus on inflation. Let's take a deep dive into the report: I. Job Growth The US economy added 162,000 jobs in August, well above expectations, while the change in July payrolls was revised up to 21,000 from -23,000 (chart). Payrolls increased by an average of 71,300 over the past three months, while the six-month average rose to 107,000, its highest since July 2024. So far this year, job growth has averaged about 80,000 per month, up sharply from just 10,000 per month in 2025. Leisure and hospitality led job growth, adding 62,000 jobs after losing 75,000 over the prior two months (chart). Local government education employment increased by 33,200 ahead of back-to-school season, while health care and social assistance also contributed meaningfully. The AI investment boom is boosting employment in other industries. Manufacturing payrolls increased by an average of 14,000 over the past three months, the strongest gain since December 2022. The three-month average of construction job growth reached its highest level since January 2025 (chart). The payroll employment diffusion index confirms that job gains are spreading, with more than half of industries adding jobs in August. Both the one-month and six-month measures of hiring breadth reached their highest levels since January 2024 (chart). The broadening is particularly evident in manufacturing, where 59% of industries added jobs in August, the highest share since October 2022 (chart). II. Unemployment and Labor Market Slack The unemployment rate remained unchanged at 4.1% in August, keeping it near prior cyclical lows (chart). The broader U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, fell to 7.7%, its lowest reading since January 2025. Another sign of limited labor-market slack is the recent decline in the number of workers employed part-time for economic reasons (chart). III. Labor Supply The unemployment rate was unchanged despite the 683,000 increase in the labor force. That was the largest gain since January 2025. The labor force participation rate rose to 61.6% in August, its first increase in nine months (chart). Nevertheless, it remains historically low. The outlook for labor force growth remains anemic. Structural headwinds from the wave of retiring Baby Boomers and a shrinking foreign-born labor force remain. August's uptick in the labor force isn't the start of a new trend. Indeed, on a y/y basis, it is still declining at a historically rapid pace (chart). IV. Earned Income Proxy Our Earned Income Proxy (EIP) for private-sector wages and salaries in personal income rose sharply in August. Average weekly hours worked rose 0.3% m/m to 34.4, the highest level since March 2024 (chart). That gain, combined with the 0.1% m/m increase in private payrolls, drove a 0.4% m/m rise in aggregate weekly hours worked to a record high (chart). Adding the 0.3% increase in average hourly earnings resulted in a robust 0.7% increase in our EIP, its best gain since January 2026 (chart). The Cleveland Fed’s Nowcasting model estimates that the headline PCED rose 0.4% m/m in August, implying that our inflation-adjusted EIP rose by around 0.3% (chart). V. Wage Inflation On a y/y basis, average hourly earnings growth eased to 3.1% in August, the slowest pace since May 2021 (chart). Slowing wage growth and subdued unit labor costs confirm that the labor market is not currently a source of inflationary pressure (chart).
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