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Morning Briefing Bullet Points & Chart Collections


The Fed, Consumers, China, & Fusion
Executive Summary: FOMC sees rates headed higher for longer, but a soft economic landing remains in the cards. …. The Consumer Discretionary sector stands to profit from the drop in prices for gas, cotton, and shipping on the high seas. Lower inflation and higher wages should help, too. …. China’s politicians may hope eliminating zero-Covid policies will boost the nation’s economy. But the likely surge of Covid cases may prompt citizens to enter self-imposed isolation. …. Scientists reported a great advancement in nuclear fusion. But expect many more years of development before we’ll know if fusion will become an economically feasible way to generate carbon-free electricity.

Executive Summary: Inflation peaked in June and continued to moderate in November. The Santa Claus rally should continue unless the Fed’s Grinches get in the way. …. Small business owners still facing labor shortages and raising wages and prices. …. S&P 500 forward revenues, earnings, and margins losing their mojo. And: What if home prices don’t fall much?

The Bubble in Everything Has Burst. Now What?
Executive Summary: The bubble in everything has burst without dire consequences so far. Surprisingly, it has been a relatively smooth transition back to the Old Normal from the New Normal. Among the biggest bubbles to pop was in the bond market. The cryptocurrency calamity hasn’t turned into a contagion. The SPAC debacle has also been contained. There is still some air in the stock market bubble, but less than there was at the beginning of the year. Home prices may get supported by a shortage of inventory.

The Call Of The Wild
Executive Summary: A few choice negative words about consumer spending prospects from a few high-profile bank CEOs tripped up the S&P 500 last week. But on Monday, a strong NM-PMI release did the same, setting investors fretting about the very opposite: that consumer spending might be too strong. Meanwhile, the bankers are crying all the way to the bank: The S&P 500 Financials sectors’ forward revenue and forward earnings have never been higher. If investors need reassurance that the economy isn’t headed south, the Atlanta Fed’s GDPNow model certainly provides it. … Also: PPI inflation is falling relatively quickly. … And: Wage growth seems to have peaked.

On Industrials, P/Es & Chinese Protestors
Executive Summary: The Industrials sector is outperforming the S&P 500 despite market expectations for a recession. The sector’s exposure to airlines, the defense industry, Boeing, and General Electric may continue to support its performance into 2023. … Also: The bear market has taken a bite out of most industries’ forward P/Es, especially those involved with Information Technology or Consumer Discretionary sectors. Meanwhile, forward P/Es have expanded for select industries in the defensive Consumer Staples and Health Care sectors. … And Jackie examines how technology both helped and hurt Chinese protesters.

On Bonds & Europe
Executive Summary: Bond yields aren’t determined as much by supply and demand as they are by investor expectations regarding inflation and the Fed’s likely response to it. But it’s helpful to stay aware of the latest supply-and-demand-related developments in the bond market, which we review today. … Also: The EU has been doing a remarkable job of finding alternative fuel sources to replace energy imports from Russia. If a war-provoked energy crisis this winter causes a recession in Europe, chances seem good that it’ll be mild and brief.

Earnings Matters
Executive Summary: Industry analysts following S&P 500 companies collectively lowered their earnings sights for this year and next when they heard Q3 earnings reports. The past three weeks have brought a reprieve in the estimate cutting, but will Q4 earnings reporting season revive it? Our soft-landing economic forecast suggests forward earnings moving sideways, not dropping, through H1-2023. … Also: PMIs correlate with the growth rates of S&P 500 earnings and revenues, and the latest readings yield insights into consumer spending patterns and inflationary pressures. … And: There’s no simple rule of thumb for when to over- and under-weight stocks of various capitalization sizes, but there are specific economic conditions that can guide the decision.

Don’t Stop Thinking About Tomorrow
Executive Summary: We’ll be glad to put this year behind us—pessimism reigned as inflation raged, the Fed tightened, and investors revalued stocks downward. But the resultant bear market was a mild one as bear markets go. If it ended on October 12, as we believe, the S&P 500 actually was in bear-market territory—down more than 20%—for only 45 days of the 282-day span. … Next year, the economic backdrop should be more bullish as inflation moderates and rising wages outpace rising prices. We expect a soft landing, not a recession. … Longer term, we stand by our “Roaring 2020s” thesis, anticipating that labor shortages and technological advances will unleash a productivity boom.

Powell, Onshoring & Tech
Executive Summary: Reassurance from Fed Chair Powell yesterday that the Fed would proceed on its tightening course with “moderation,” to avoid setting off a recession, was music to investors’ ears—lifting stock prices and lowering bond yields. Today, we look at the words that had such a palliative effect on markets and recap Powell’s main points, especially about inflation. … Also: Rising reshoring and FDI trends suggest a revival of US manufacturing, which will benefit supply chains and labor markets. … And: Jackie examines the reasons for tech stocks’ recent malaise.

2024 Is Coming!
Executive Summary: As 2023 approaches and progresses, it will be the 2024 outlook that the stock market increasingly will discount. Today, we examine the stock market equation P = P/E x E, with E representing S&P 500 forward earnings, in the context of both the consensus and our expectations for earnings and the economic backdrop next year and in 2024. … Also: The inverted yield curve is predicting neither a credit crunch nor a recession, in our view. This time, it may be anticipating a hasty retreat of inflation. That could mean that the yields on both the 2-year and 10-year Treasuries are peaking.

Anxious Index
Executive Summary: If the economy is in for a hard landing next year, it would be the most widely anticipated recession ever. The Philly Fed’s survey of forecasters, the WSJ’s survey of economists, and even the Misery Index that reflects the sum of unemployment and inflation rates point to a recession. … But we think this time is different. There’s been no broad-based credit crunch, liquidity is ample, consumer incomes are growing, multi-family housing remains strong, capital spending does too, and fiscal stimulus has been gushing. Real GDP shouldn’t contract in such an environment but grow, slowly but surely. We’re in the soft-landing camp.

2023 Is Coming!
Executive Summary: The consensus is now bracing for a 2023 recession that tempers inflation and ends the Fed’s reign of tightening but also depresses corporate earnings, suggesting more downside for stocks’ valuation multiples. We’re more optimistic, expecting no broad-based recession but a rolling one, no continued bear market in stocks but sluggish earnings limiting their upside. … Both scenarios hinge on inflation: If it remains persistently high despite having peaked, expect a broad-based recession and all that entails. If not, the 2023 outlook will be brighter. … Also: A look at data supporting both soft- and hard-landing scenarios. … And: What the Fed might do next.

Thanksgiving In The Twilight Zone
Executive Summary: While Covid-19 has upended life the world over, Americans have plenty of blessings to count this Thanksgiving. The US economy continues to grow, employment continues to expand, and consumers continue to spend. Although the single-family housing industry is in recession, multi-family housing starts are going strong. The auto industry is also doing well despite tighter credit conditions. Capital spending remains robust. The nasty supply-chain disruptions that had fueled high inflation appear to be over. And the US fossil fuel industry not only is meeting domestic energy needs but exporting to help meet Europe’s.

On Consumers, Chips & The Oceans
Executive Summary: Consumers are still spending robustly in many categories, as the surprisingly strong retail sales report for October showed. But Walmart and Target brass speaking on Q3 conference calls described heightened budget consciousness across income demographics. And while consumers have income, their balance sheets have been weakening as they take on more debt. … Are semiconductor stocks becoming attractive at their depressed valuations? Perhaps, but news this week reminds us why valuations are so depressed—demand is weak and analysts pessimistic. … Also: The oceans are about to get greener if innovative solutions employing AI, 3D printing, and low-tech dragnets succeed.

On Inflation & Financial Stability
Executive Summary: The inflation-is-peaking euphoria that’s driven the stock market skyward in recent days adds to our confidence that the bear market bottomed on October 12. … The latest batch of inflation indicators was mixed but overall suggests progress in the right direction, which may mean the Fed has done enough tightening already. … Don’t fear systemic effects from the bursting of the cryptocurrency bubble—US banks are just fine. … Also: Melissa examines what the Fed thinks about the resilience of the US financial system, recapping points from its latest Financial Stability Report.

Where Inflation Is Plummeting & Soaring
Executive Summary: US inflation is sticking roughly to the script we’ve been expecting, having peaked in the summer and fallen since. We expect further declines through 2023. Today, we review what’s been going on beneath the surface of the headline rate, including the recent trajectories of nondurable goods, durable goods, and services inflation along with our expectations for each. … Also: The central banks of Europe, Japan, and China each are battling inflation along with daunting challenges specific to them.

On Earnings & Inflation
Executive Summary: Economic recessions invariably produce earnings recessions, but earnings slowdowns and downturns can occur without economic recessions: Nominal GDP and revenues growth can stay strong as profit margins narrow, causing earnings growth to falter. That’s what seems to be happening now, with the earnings weakness looking like that of a soft, not hard, landing. Whether that changes up ahead depends much on what happens to profit margins. … In this context, Joe discusses the latest earnings results for Q3, explaining how to interpret the results supplied by two different data providers. …And: A look at the components of October’s CPI results, which cheered the stock market at the end of last week. … Also: Feshbach sees trading range ahead.

On Transports, Oil & Climate Change
Executive Summary: Does the recent rally in the S&P Transports signal that investors think transportation stocks have been beaten down enough so far this year? Will they continue to chug uphill despite the drag from slowing fundamentals? Jackie examines the challenges up ahead for shippers, truckers, railroads, and air freight and logistics companies; airlines, though, seem headed for blue skies. … Also: A look at the oil market’s tug of war between China’s downward pressure and Russia’s upward pressure on prices. … And: Today’s Disruptive Technologies segment focuses on news from the UN’s international climate change conference, COP27.

On Political Cycles, Earnings Estimates & Fiscal Fatigue
Executive Summary: The stock market historically has performed well after midterm elections and during third years of presidential cycles, but none of these positive political cyclical trends will make much difference if inflation remains elevated, which would force the Fed to cause a hard landing of the economy. … Also: Analysts’ earnings estimates are falling mostly because their expectations for margins are falling. We review the relevant data for the S&P 500 sectors. … And: How fiscal policy has contributed to the deficit and inflation.

On Labor, Productivity & Wages
Executive Summary: For a variety of reasons, there’s a severe mismatch between the demand for and supply of labor in the US. That’s created a maelstrom in the market, with extraordinary levels of turnover: One third of payroll employees have quit their jobs over the past 12 months, most for higher-paying ones. That’s driving up wage inflation and driving down productivity. … But we still expect productivity to recover this decade as businesses react by investing in productivity-boosting technologies—our “Roaring 2020s” scenario. … While the latest data show some moderation in wage inflation, it probably won’t continue to moderate sustainably until turnover subsides.

Powell Is From Mars, Brainard Is From Venus
Executive Summary: Has the stock market been voting early? It‘s up 5% since the S&P 500’s October 12 bottom—which may turn out to be the bear market’s ultimate bottom. Tomorrow’s midterm elections may further boost stock prices in coming months if history is a guide. Our soft-landing economic outlook, if it pans out (60% subjective odds), may be another wind at the stock market’s back. … A headwind last week was Fed Chair Powell’s peak hawkishness, but we expect to hear counterbalancing views from other Fed officials now that their quiet period is over. … Much now—both the economic and financial market outlooks—hinges on inflation reports in coming months. … On inflation, Brainard makes sense. … And: Dr. Ed reviews “Don’t Worry Darling” (+ +).

On Powell, China, Consumers & AI
Executive Summary: Fed Chair Powell’s hawkish press conference yesterday deflated the stock market, but we think the S&P 500 bottomed on October 12 and see a few potentially uplifting developments to come. … Also: What might it take for the China MSCI to start performing better? Jackie considers this question and examines two big issues holding it back. … And: The shift in consumer purchasing patterns from stuff to services was apparent in the Q3 earnings of companies affected both positively and negatively. … Finally, today’s Disruptive Technologies piece showcases the rapidly advancing technology of AI.

On Powell, Inflation & Home Prices
Executive Summary: After Fed Chair Powell’s press conference today, investors are bound to see more light at the end of the tightening tunnel. We’re hoping he’ll suggest that just two more 75bps turns of the federal-funds-rate screw—one announced today and another in December—may be tight enough. … Also: We assess the latest persistently high inflation data with an eye toward assessing whether our inflation forecast for the rest of this year is overly optimistic. … And: Housing prices are falling in the wake of rising mortgage rates. But we don’t see the market crashing as in 2007, Melissa explains. The downward drivers then and now are nothing alike.

Back To The Old Normal?
Executive Summary: The unconventional ultra-easy monetary policy that reigned from the Great Financial Crisis to the Great Virus Crisis—a.k.a. the “New Normal”—aimed to stimulate the economy and shore up inflation. Now the “Old Normal” is back, characterized by more conventional tight monetary policy aimed at taming inflation, even if that kickstarts a recession. … But this post-pandemic business cycle isn’t following the usual Old Normal script—instead featuring an oddly quick snapback of GDP growth and oddly vigorous comeback of inflation. … Today, we look at what’s been happening in various segments of the economy this year and forecast what’s in store for 2023.

Bear Bottoms
Executive Summary: The bear market has clawed 30% out of stock valuations, returning the S&P 500’s forward P/E to its historical average of 15. But October 12 may have marked the bear’s bottom. If GDP and inflation perform as we expect and the Fed does what everyone expects, that bottom should hold. … We think the stock market has discounted a soft-landing scenario (to which we give a 60% subjective probability) but is nervous about a hard landing (40%). … Also: The MegaCap-8 stocks’ outsized influence over their resident indexes has been diminished. … Movie review: “All Quiet on the Western Front” (+ + +).

China and Semiconductors
Executive Summary: Today, our focus is the semiconductor and semiconductor equipment manufacturing industries, both down on their luck these days. The US Commerce Department has barred the door to one of their major markets, China. Yet the CEOs have been curiously acquiescent. … Jackie examines the administration’s possible motivations and the impacts on specific players in the space. … This bad news couldn’t have hit at a worse time: The semiconductor cycle may be heading south. Earnings estimates have been getting slashed and stocks battered.

ECB On Thursday, Inflation On Friday
Executive Summary: ECB hawks will be squawking at their meeting on Thursday. Fed hawks will be all over the critical US inflation data that comes out on Friday: The Employment Cost Index may suggest a peaking of wage inflation, and September’s PCED may reflect a declining headline rate (albeit rising core rate, as did September’s CPI, due to services inflation). Today, we examine the significance of each. … Also: We drill down to inflation within services industries, where the worst of it now roosts. … And: Once again, the ECB is on a mission and vowing to “do whatever it takes” to achieve it. This time, the goal is smothering Europe’s inflation fire even if GDP is dampened in the process.

Your Wish Is Our Command
Executive Summary: Our Monday webinars often don’t allow time to answer all your questions. So today’s Morning Briefing is devoted to a few recent ones. … We don’t expect much economic impact when the drawdown of the SPR ends, as we don’t foresee gasoline prices spiking as a result since tapping the SPR didn’t contribute much to the decline in prices. … Also: We counter our skeptics who expect a rampant recession, explaining why we see greater odds (60%) that the gently rolling recession already underway will continue. … And: The strong dollar should peak when monetary policymakers’ hawkishness does, to the relief of US companies with foreign-derived sales and earnings.

The Great Monetary Policy Reversal
Executive Summary: Both the bearish and bullish cases for the stock market currently boil down to how the economy responds to the tectonic monetary policy adjustment from unconventionally ultra-easy to conventionally tight, a.k.a. “The Great Monetary Policy Reversal.” … We describe both cases, pointing out that bullish could morph into bearish if services inflation doesn’t abate. We’re in the minority as glass-half-full bulls, counting on a muted rolling recession, with rolling inflation, passing through the economy and out. … Also: Fed officials may be dialing back their hawkishness, which would support the bullish case. We think monetary policy is decidedly restrictive now already. … And: Midterm elections could energize Santa Claus rally. … Plus: Dr Ed reviews “Eiffel” (+).

On China, Banks & Solar
Executive Summary: China’s economy is ailing, but you wouldn’t know it to hear President Xi’s speech before the Chinese Communist Party’s annual National Congress. Jackie puts into perspective the points he made and, more importantly, the ones he omitted. … Also: Big banks’ Q3 earnings reports showcase their resilience so far in the current higher interest-rate environment, but leveraged loans could be a problem area in the future if companies have trouble making higher interest payments. … And: A look at solar energy’s sunny future: With new technologies making panels lighter and more versatile, the sky’s the limit to their potential applications.

On Mid-Terms, Earnings & Commodities
Executive Summary: Octobers tend to turn out decent returns during mid-term election years. Twelve bear markets have met their demise during October, often setting the stage for Santa Claus rallies. … Q3 earnings season has stumbled out of the gate, but stocks have rallied anyway. We look at which sectors and industries benefited the most and where estimate-cutting industry analysts are cutting the most. … Also: Melissa discusses how recent news from China and Europe has been affecting commodities prices.

Going Fishing
Executive Summary: Our bond market analysis suggests that the 10-year Treasury bond yield might peak at 4.00%-4.25%, probably in November after the Fed raises the federal funds rate by 75bps and possibly in anticipation of one final 75bps hike in December that puts the terminal federal funds rate at 4.50%-4.75%. … Our stock market outlook involves the S&P 500 remaining in a volatile trading range between 3666 and 4305 for the rest of this year. … Also: Why hasn’t the labor-force participation rate snapped back to its pre-pandemic levels now that the pandemic has abated? Melissa explores various reasons. … And: She examines trends perpetuating today’s extreme labor shortages.

Mostly All About Inflation
Executive Summary: More persistently pernicious inflation than expected is at the root of the financial market’s bearish sentiment. Revenues, profit margins, and earnings have been holding up relatively well; the market’s big problem is a significant downward rerating of the P/E multiples that investors are willing to pay in this inflationary economic environment. … We continue to think the economy is undergoing a rolling recession afflicting different industries at different times. We also think that inflation might be following a similar rolling script. Notably, goods inflation pressures have abated as services inflation pressures have picked up.

On Semis, Valuation & Energy
Executive Summary: The cyclical S&P 500 Semiconductors and Semiconductor Equipment industry indexes have had a terrible week and year. … Also: The stock market’s poor recent performance has been mostly attributable to valuation resets at lower levels. Jackie finds a mixed valuation picture among sectors and industries. … And: Developments that exert upward pressure on oil prices have been countered by factors with the opposite effect; three in particular have been sapping global demand for oil lately.

The Most Widely Anticipated Recession In History
Executive Summary: Some areas of US economy are thriving while others flounder, and several looming challenges signal tough times ahead. JPMorgan Chase’s CEO yesterday said a recession is coming. Our assessment is that a rolling recession is already here and should linger well into next year. … We’re raising our Q3 forecast for real GDP and lowering our Q4 one. … Notably, small business owners remain depressed, with inflation topping their worry list even as they’re forced to exacerbate it. … Also: Industry analysts have been continuing to lower their earnings sights; we may do the same for S&P 500 earnings this year and next depending on the strength of Q3 earnings results.

More Inflation (News) Is Coming
Executive Summary: The financial markets have been laser focused on inflation news this year, and are bracing for the next couple of days’ releases. Thursday’s CPI report for September is bound to move the markets, and tomorrow should bring a sneak peek of what it holds in store via the PPI release, specifically its personal consumption expenditures index. … Today, we examine the inflation information available to date in preparation for the big releases. … Notably, global supply-chain pressures eased in September, and the prices-paid indexes in both manufacturing and nonmanufacturing PMIs are way down from their peaks.

Volcker 2.0 vs Bernanke 2.0?
Executive Summary: Our current Fed chief has recently turned to Paul Volcker’s playbook to fight inflation. The risk is that he will trigger the kind of financial instability that occurred during Ben Bernanke’s term as Fed chair. Powell and his colleagues seem hellbent on further rate hikes with no pause to assess the impacts of recent ones. One Fed governor recognizes the risks of doing so but agrees with the Fed’s risky course. Another one is quite dismissive of financial stability concerns. But we see red flags in the weakness of the housing market, the negative wealth effect, and the strength of the dollar. … Also: The labor market remains robust, but wage inflation may be peaking. … And: Dr. Ed reviews “Operation Mincemeat” (+ +).

On Earnings, JOLTS & Housing
Executive Summary: While S&P 500 forward revenues has hit successive record highs lately, the forward profit margin and forward earnings both peaked in June. Since then, forward earnings has been flat. We see more of the same for earnings given our expectation that economic growth will be close to zero in our growth recession scenario. … Also: One in three workers quit their jobs over the past year! But their ex-employers quickly rehired. We examine the reasons for the labor market’s mind-boggling pace of job churn. … And: Home affordability challenges have sent the recently hot housing market into a deep freeze. Melissa traces the causes and the effects on homebuilders.

On Central Bankers, Stocks & Batteries
Executive Summary: Policymakers in both China and the UK recently have made policy 180s, abandoning their former plans. Now US financial markets seem to think economic conditions will compel the Fed to do the same, ending this round of tightening sooner rather than later. … Did the stock market’s impressive comeback rally of the past two days benefit the same S&P 500 sectors and industries as last summer’s two-month rally did? Jackie takes a look, isolating the most dramatic winners and losers of both. … And: GM and other companies are charging ahead on the development of solid-state batteries for electric vehicles. In our ongoing coverage of disruptive technologies, we highlight some of their plans.

On Valuation, Liquidity & Inflation
Executive Summary: The S&P 500’s forward P/E has sunk practically to its historical average of 15.0. What happens to it next depends much on what happens to the economy. If our growth recession scenario continues to play out (to which we subjectively assign 60% odds), the historical average valuation likely will hold and the S&P 500 drift sideways until climbing again in 2023; if a hard-landing recession scenario unfolds (40% odds), the P/E may sink into the single digits. … On the bright side, the financial markets have plenty of liquidity to buoy valuations. … Also: We look at what inflation has been doing by two different measures, the CPI and PCED, and examine how they differ.

On Volcker 2.0, Recession & Inflation
Executive Summary: The latest economic indicators suggest that the economy is doing better than expected—supported by consumer spending but dragged down by the housing recession—but also that inflation remains too high. That alignment increases the odds of more Fed tightening than previously expected, a higher terminal fed funds rate, and a Fed-induced hard landing. A hard landing isn’t currently our economic forecast—we see the growth recession continuing through year-end. But fears of a Fed-induced hard landing are increasing bearishness in both bond and stock markets. We are assessing whether our forecasts for both S&P 500 earnings and valuation might be too optimistic. … Also: Dr. Ed reviews “Blonde” (+).

Troubled Times In The UK & China
Executive Summary: In the UK, fiscal and monetary policy are at odds. Massive tax cuts and new spending programs will boost government debt—aggravating inflation even as the BOE is trying to subdue it. Bond Vigilantes clearly disapprove. … In China, the real estate sector is in shambles, and the government’s investments abroad are going belly up. A messy debt restructuring looks likely. The PBOC is hustling to prop up both the falling yuan and the weakening economy, introducing new rules to discourage shorting the currency and easing monetary policy at a time when other central banks are tightening.

Recessions Here & There
Executive Summary: The Fed is hawkish, investors are bearish, and now industry analysts are cutting their earnings estimates after FedEx’s recent warning about macroeconomic trends. … The latest economic indicators still suggest a growth recession is underway in the US. … Over in Europe, economic prospects are dimming as the daylight hours shorten, with no gas likely from Russia this winter. Dour business sentiment in Germany suggests a broad-based recession there. … With debt limits for EU member countries suspended for another year, we expect governments to make plenty of investments, especially in digital and energy areas.

Powell’s Latest Pivot Shocks Markets
Executive Summary: Pessimism and bearishness are widespread; from a contrarian standpoint, that spells buying opportunities for the long term. … Meanwhile, monetary tightening appears to be making headway against inflation given the dollar’s strength and weakening commodity prices. We think PCED inflation peaked in June and is on track to fall to 3.0%-4.0% next year. One more 75bps rate hike in November may be enough. … We’ve reassessed our economic and stock market forecasts given renewed Fed hawkishness. We still expect a growth recession and range-bound S&P 500, but with greater short-term downside risk. And we now see the 10-year bond yield peaking at 4.25%. … Also: A dizzying review of Powell’s recent pivots.

‘Keeping At It’
Executive Summary: We’re in a period of global gloom, with pessimism blanketing different countries for different reasons. In the US, measures of consumer, investor, and business sentiment all have sunk recently, which the stock market mirrors. America’s despondency stems much from the Fed’s words and deeds as it attempts to corral inflation at all costs. … Today, we offer a brief review of Fed Chair Powell’s public statements over recent months, tracing his increasing hawkishness. … And: How’s the economy been holding up in the face of Fed hawkishness? So far, so good. The latest data jibe with our growth recession scenario, but the risks of a full-blown recession are obviously increasing.

Consumers, Lithium & Waves
Executive Summary: With recession fears topping investors’ worry list, why has the cyclical S&P 500 Consumer Discretionary sector outperformed every other sector over the past two months? Jackie explores. … Also: Lithium demand is expected to surge in coming years, driven by EVs—but can supply keep up? Would-be lithium producers face daunting roadblocks. … And: A look at the latest wave in alternative energy, wave energy.

On Earnings & Central Banks
Executive Summary: S&P 500 forward earnings works well as a leading indicator of actual results during expansions and a coincident indicator of them during recessions; the same goes for forward revenues and forward profit margins. … Our takeaways from the three forward data series add up to a flat forward earnings outlook through early next year—a rosy viewpoint amid widespread recession trepidation. Our forward earnings and P/E forecasts together suggest a range-bound S&P 500 for the rest of this year. … Also: Melissa ferrets out the policy intentions of the ECB and BOJ.

How’s Business?
Executive Summary: Today we focus on business sales, showing how it relates to the key economic indicators that feed into our economic outlook and how it correlates with S&P 500 companies’ aggregate and forward revenues, feeding into our stock market outlook. … For the economy, we forecast a “rolling recession”—a.k.a. “growth recession”—that depresses different industries at different times but avoids shrinking the overall economy. For the S&P 500, we estimate forward EPS of $215 this year, up 3.1% y/y, and $235 next year, up 9.3%.

On Blackouts & Liquidity
Executive Summary: Fed Chair Powell seems to be channeling his 1970s predecessor Paul Volcker—who masterfully tamed high inflation amid a severe recession. Today, we assess how August’s CPI shocker may alter the FOMC’s economic projections and policy decisions. … We expect Wednesday’s FOMC meeting to bring a 100bps hike in the fed funds rate to 3.25%-3.50% and more hawkish projections of committee members, suggesting a terminal rate this tightening cycle of 4.25%-4.50%. … For the economy, we expect the current rolling recession to continue without turning into an official recession because there is ample liquidity to avert a credit crunch. And: Dr. Ed reviews “Five Days at Memorial” (+ + +).

MegaCap-8, Strikes & Hydrogen
Executive Summary: How the mighty have fallen. We’re talking about the eight large-capitalization stocks dubbed the “MegaCap-8,” which collectively—and most individually—have sorely underperformed benchmarks. When these behemoths swoon, most Growth portfolios feel the thud. … Also: Unions are up in arms over wages that aren’t surging as fast as inflation, and they’re feeling empowered by the tight labor market. Strikes may be coming. Jackie looks at some hot spots in various industries. … And: Don’t dismiss hydrogen as a green alternative to fossil fuels. It’s starting to look like the go-to fuel source for energy-intensive industrial processes.

Corporate Finance Review
Executive Summary: An Austrian assessment of August’s CPI. … And: It’s time again to focus on US corporate finance. We find American businesses in great shape—with record-high profits and cash flow on income statements and solid balance sheets. The effect of the chronic labor shortage on profit margins is businesses’ biggest challenge, but workarounds are coming that should boost productivity. … Also: Progressives give share buybacks a bad name, but they play a key role in corporate finance: counteracting the dilution from stock compensation plans. … And: Both worker compensation and capital spending remain on healthy uptrends, also contrary to popular (progressive) belief. … Finally, we recap capital markets activity from Fed data.

Keeping Up With The Joneses
Executive Summary: Q2 GDP revisions may well show that the US economy was not in a recession during H1 after all. If so, we have the consumer to thank. Consumer spending has held up well this year despite depressed sentiment and inflation-eroded purchasing power. But purchasing power soon should get a shot in the arm as wage inflation starts outpacing price inflation. … Also: A look at how much the average US household spends and on what. … News flash: “The Joneses” have been spending as though they’ve never been better off—because they haven’t! Inflation-adjusted consumption per household has been running at a record high.

What’s The Matter With Productivity?
Executive Summary: We aren’t giving up on our “Roaring 2020s” scenario. The idea is that labor shortages should trigger capital spending on technology that boosts productivity. The pandemic derailed that train over the first three years of the decade, exacerbating the chronic labor shortage and temporarily squashing productivity growth. We expect productivity growth to resume during H2 and strengthen to peak around 3.5%-4.0% within the next few years. … Boosting this rosy scenario: US manufacturers are spending more on productivity-enhancing tech as they expand domestic production capacity—which should continue as they move out of China.

Bad Times In Europe & China
Executive Summary: European governments aren’t about to leave their people out in the cold after Russia suspended its gas deliveries to Germany indefinitely. Jackie examines plans they’ve pulled together to keep people warm, businesses open, and utilities financially viable. … Also: China has been fighting to vanquish Covid via strict lockdowns whenever and wherever the slippery foe appears. The government’s failure to rid the country of Covid is one problem leaders will want to keep swept under the rug when the Chinese Communist Party meets in mid-October. Another is a UN report shining a spotlight on China’s outrageous human rights abuses perpetrated against Uyghurs.

Can TINAC Survive A Global Recession?
Executive Summary: Prospects for a global recession have risen in the wake of recent geopolitical developments. Global economic indicators have been showing signs of weakness too. … If the global economy sinks into a recession, will the US economy follow suit, as typically has happened in the past? Not necessarily this time. We still expect no more than a “rolling recession” that hits different sectors at different times without an economy-wide downturn. … Our rationale for recommending overweighting US stocks in global portfolios still holds—i.e., there is no alternative country (TINAC). … And: Joe clears up some confusion about Q2 earnings.

Back To The Old Normal?
Executive Summary: Fed Chair Powell has put the kibosh on financial markets’ wishful thinking that the Fed will start easing monetary policy next year. How will the Fed—and investors—know when it has achieved optimal tightening, with monetary policy restrictive enough to tame inflation but not enough to touch off a recession? “Immaculate disinflation” has proven elusive in the past, but we think it’s possible today. A federal funds rate of 3.00%-4.00% might be the sweet spot, harkening back to the “Old Normal” before the 2008 financial crisis. … Also: Indicators suggest the broad economy is growing this quarter, though certain sectors aren’t. … And: Dr. Ed reviews “Candy” (+ + +).

China, Earnings & FedNow
Executive Summary: China’s government is mobilizing to shore up the country’s struggling, debt-laden economy. New initiatives will facilitate home-buying, guarantee the debt of select private developers, make low-interest loans to banks, and provide financial backing for infrastructure projects. More may be needed. … Industry analysts still expect S&P 500 companies to log respectable earnings growth this year and next despite having lowered their sights for many. Jackie examines how and why estimates have been changing for various sectors and industries. … And better late than never: FedNow brings the instantaneous financial transactions that other countries enjoy to the US.

Earnings Matter
Executive Summary: Will the rolling recession—which we believe is occurring now in the US economy—steamroll corporate earnings growth? Our economic outlook suggests that earnings growth could turn negative, but not by much and not for long. … We think August’s M-PMI will be telling, suggesting that both this index and S&P 500 earnings growth are getting closer to bottoming. … And: Melissa looks under the hood of the auto manufacturing industry, still challenged globally by parts-supply problems and still short on inventory. … Also: A look at various factors driving rising EV sales.

Anatomy Of A Rolling Recession
Executive Summary: In an eight-minute talk at Jackson Hole last week, the Fed chair squawked like a true hawk and obliterated $1.2 trillion in S&P 500 market capitalization. He said bringing inflation down will be painful. He didn’t say how painful. … We don’t see an “official” recession, but a “growth recession” that rolls through economic sectors in succession while still allowing real GDP to grow overall, albeit slowly. … In fact, such a rolling recession is likely underway already. We look at how vulnerable areas of the economy are holding up.

Powell’s Latest Pivot Won’t Be His Last
Executive Summary: Keeping track of whether Fed Chair Powell is dovish or hawkish is making us dizzy. His latest clues—dropped at last week’s Jackson Hole conference—reversed the dovish impression he’d left in July that caused stocks to rally. So stocks pivoted southward last week. … We anticipate Powell’s next pivot and potentially encouraging inflation news. … Might BEA’s upcoming H1 GDP revisions reveal that the economy grew after all, making the “technical recession” illusory? We wouldn’t be surprised. We project 1.5% GDP growth during H2 and 2.5% next year. … Also: Q2 data on S&P 500 revenues and profits show new record highs for both. … And: Dr. Ed reviews “Blackbird.”

Industrials, Russia & Robots
Executive Summary: A heat wave and drought are prompting China to close some industrial plants in hard hit regions to preserve electricity for air conditioning. In Europe, some industrial plant owners are closing shop because surging electricity prices are battering the bottom line. Look for supply chain problems to ensue. The Eurozone’s August PMI took a hit. … A study out of Yale University contends Western sanctions are taking a large toll on Russia’s economy. We take a look. … North American companies bought more robots in Q1 than ever before. Here are some new ways robots are making companies more efficient today and a peek at what scientists are working on for the future. Pizza anyone?

Will Inflation Persist?
Executive Summary: If inflation is peaking, definitive proof could make all the difference to the near-term direction of the stock market. It could also affect how hard the Fed pumps the monetary brakes and what that does to the economy. Our happy outlook features inflation peaking, tightening ending sooner rather than later, and the economy slowly growing. … Recent data releases provide peeks into upcoming inflation readings—and some signs that it is peaking. … Biden’s Inflation Reduction Act seems almost satirically named: The Act is more about climate than inflation, think-tanks say it will hardly move the inflation needle, and Melissa found several aspects to be downright inflationary.

Raging Debate
Executive Summary: Today, we examine stock market sentiment—where it’s been this year and why, as well as where it might be headed. … The bulls had a good two-month run, for a host of reasons we discuss, but it might be ending as they go on the defensive for a while for a host of other reasons. … And: QE lifted the Fed’s securities holdings and the stock market followed suit during the bull market years. But does that necessarily mean the opposite will happen when QT starts to unwind those holdings in September? The bears think so, but we see reasons to differ.

Searching For Godot
Executive Summary: The economic slowdown so far this year is not the game-changing “official” recession so widely feared. Waiting and waiting for this Godot of a recession is muting economic activity, but also inhibiting excesses. That’s why we expect any recession that does show up—a scenario we give 35% odds—to be mild and roll through the economy gradually by sector. We see a slow-growth scenario as the most likely outlook (60% odds) and an inflationary boom the least (5%). … Also: We turn our spotlight on what a rolling recession might look like and how September might treat the stock market.

Consumers, Russia & The Metaverse
Executive Summary: With gasoline prices down in July, consumers had more money to spend on discretionary purchases, and retailers of most kinds benefited. Jackie taps Target’s Q2 results for consumer-spending trends and takeaways . … Also: Waging war in Ukraine has cost the Russian economy a great deal, but Q2 GDP contracted much less than economists expected, buoyed by the high prices that Russia’s energy exports fetched. … And: The Metaverse is hopping with diverse events—from concerts and celebrity-hosted parties to fashion shows and fine art sales. And everyone’s invited.

More On The Bulls Vs Bears Debate
Executive Summary: Is the stock market rally since June 16 a rally within the bear market or the start of a new bull market? The answer hinges on the economic outlook. We’re in the bull camp, believing that inflation is peaking, Fed tightening is nearly over, and a recession won’t result; bears may believe the opposite. … Analysts have been cutting their estimates for earnings but not revenues, so expected profit margins have been falling. That suggests they see no recession, just more difficulty passing fast-rising costs on to customers. … Also: Peeks at the MegaCap-8’s rally impacts on the S&P 500, Senator Schumer’s wrong-headed anti-buyback stance, and alternative measures of inflation.

Why Are Oil Prices Falling?
Executive Summary: Wondering what brought the price of gasoline and other petroleum products back down toward earth in recent weeks? Our data show it’s not Biden’s release of crude oil reserves but the effects of previously soaring prices—which depressed demand and sparked production—combined with China’s economic slowdown. … Speaking of which: Just when we thought the much-anticipated recession would be a no-show like Godot, he was spotted in China and maybe New York too. Might the US be in for a “rolling recession” à la the 1980s?

Waiting For Godot
Executive Summary: Today, we sift through the recent economic data and recent Fed head chatter for clues to the critical question: Now that recession fears have abated for 2022, what are the odds of one in 2023? … We give 60% odds to a slow-growth scenario, with GDP growing 1.5% in H2-2022 and 2.5% in 2023; 35% odds to a recession next year precipitated by the Fed’s inflation battle; and 5% odds to a boom scenario. … Critical to the recession question is whether inflation is peaking. We think so but need to see more evidence to be sure. … And: Dr. Ed reviews “Elvis” (+ + +).

Health Care, Earnings & Uncle Sam
Executive Summary: Today, Jackie takes the pulse of the S&P 500 Health Care sector, examining the M&A activity that has spurred it to outperform the market ytd and what the Inflation Reduction Act will mean for drug makers. … Also: A look at the 2023 earnings growth prospects of various S&P 500 sectors and industries. … And: How the Inflation Reduction Act aims to buy a greener US. … Plus: What will the newly passed CHIPS and Science Act spend $280 billion on? Lots more than chips.

Earnings & Productivity
Executive Summary: Why are industry analysts now slashing the estimates they had raised throughout the year’s first half (even as the economy slowed)? … Why has productivity growth dropped to its weakest y/y rate since 1947? Is it simply returning to its pre-pandemic trendline? … Why has household formation suddenly rebounded? … How did landlords get so lucky as to find themselves in a “Golden Age”? … Today, we explain these economic anomalies, aided by recent data releases. … Also: With the economy in a growth recession and forward earnings starting to flatten, the valuation-led stock market rally might sputter for a while.

Around The World
Executive Summary: Zooming out to assess big-picture data for major global economies, we conclude that Germany and China look most vulnerable to a recession next year. The US wouldn’t be immune to a global recession, but certain factors help insulate it. These include heavy capital inflows resulting from foreign investors’—correct—perception that US financial markets offer the safest harbor there is. Overweighting the US in global portfolios remains prudent. … Also: Germany’s economy faces duress this winter as heating the country becomes a challenge, and China’s economy is suffering at the hands of homegrown problems related to housing, lockdowns, and demographics.

No Recession In Labor Market
Executive Summary: July’s surprisingly strong payroll employment report points to a strong July reading for the Index of Coincident Economic Indicators. This is good news for the economy, bad news for the fixed-income market, and mixed news for the stock market. While it squashes near-term recession fears, it ups prospective Fed hawkishness. … Within the labor market, there is unprecedented churn as people quit in record numbers for higher-paying positions elsewhere. Over half the workers in July’s employment report were hired over the past year! But consumer prices are spiraling upward along with wages, so even job-jumpers aren’t seeing much wage growth after adjusting for inflation.

Emerging Markets, Oil Refiners & Nuclear Power Plants
Executive Summary: Today, Jackie takes us on a quick world tour focusing on emerging economies. Many are ailing, but a few offer a safe haven from geopolitical storms. So does the US with its strong dollar, huge economy, and relatively calm body politic. … Also: Oil refiners had a stellar Q2 operating at near maximum capacity to meet surging demand. The industry is on track for another year of eye-popping revenues and earnings growth. … And in the disruptive technologies department, we highlight the potential of SMRs—small modular (nuclear) reactors.

US Earnings & European Gas
Executive Summary: Industry analysts finally have begun reining in their high earnings, revenues, and profit margin expectations. Their moves suggest that analysts collectively expect inflation to moderate but don’t anticipate a recession. … Also: Europe may face a cold, dark winter—literally and economically—if Russia doesn’t restore the natural gas flows to Europe that the EU depends on. Melissa presents a timeline of Russia’s gas-depriving moves and the responses from government and gas futures markets. … And: Soaring energy prices are dampening European consumer and business sentiment, boding ill for GDP growth and corporate earnings prospects. The only EMU MSCI sector with unscathed earnings growth expectations is Energy. .

Valuation, M-PMI & Consumers
Executive Summary: Yesterday’s M-PMI report jibed with our view that the US economy is in a growth recession with some sources of inflation abating—which is bullish for stocks. … Since we think the S&P 500 might have bottomed on June 16, we’re raising our target ranges for its price index and forward P/E multiple while keeping our earnings expectations unchanged. … Also: The recent consumer spending and saving data paint a challenging picture: The “inflation tax” has sapped consumers’ purchasing power, causing less saving and more borrowing to support essential spending. Consumer sentiment hasn’t been so negative in nine years. Nevertheless, consumers should continue to pivot from buying goods to buying services.

Switching Planets: Investors Now From Venus, Analysts From Mars
Executive Summary: We’ve been making the case that the latest bear market might have bottomed on June 16. So far, so good. … Just a few weeks back, industry analysts’ earnings estimates suggested they were oblivious to investors’ recession fears, and we quipped that the former was from Venus, the latter from Mars. Now it’s investors interpreting news with a rosy bias as analysts shave their estimates. … The stock market now appears to be discounting investors’ recent hopes of peak inflation, peak Fed hawkishness, and a mild recession. … Also: We examine Powell’s suggestion that monetary policy is nearly restrictive. … And: The Bond Vigilantes are from Venus now too.

The Fed, Earnings, Chips & AI
Executive Summary: Good news for a change! Investors cheered the Fed’s no-surprises announcement of another 75bps hike in the federal funds rate yesterday. Moreover, Q2 earnings reports have been confirming our soft-landing scenario for the economy, and S&P 500 companies’ earnings are expected to hold up respectably this year and next. … But Q2 reports revealed pain points for certain industries—e.g., retailers that cater to lower-income consumers felt the brunt of inflation-strained consumer budgets. … Semiconductor makers on Q2 calls addressed worries about customers’ inventory buildups. … And: What won’t AI be transforming? Today, we look at how AI is facilitating new drug development.

All About Housing
Executive Summary: The US housing market is undergoing a reversal of fortune. The scorching hot market conditions of six months ago have reversed, as 40% home appreciation over the past two years plus soaring mortgage rates have priced homeownership beyond many Americans’ grasp. The resultant greater demand for rental units has spurred high rent inflation. Additionally, the pool of would-be homebuyers has shrunk, more deals are falling apart before closing, motivated sellers have begun dropping listing prices, and builders are slashing prices. … Today, we look at all things housing, including how recent demographic and domestic migration trends have affected market conditions and at how market conditions are affecting homebuilders.

How Much Rate Hiking Does QT2 Equal?
Executive Summary: The Fed may have 100bps less of rate hiking to do thanks to the tightening effects of the strong dollar and QT2, the Fed’s balance-sheet-reduction plan. That means the Fed may be done raising the federal funds rate in September after just two more 75bps increases to 3.00%. … Indeed, the Treasury market appears to be discounting a 3.00% peak, sooner rather than later. … The mortgage market in particular must be discounting QT2, as the Fed’s rate hiking alone can’t account for how high mortgage rates have soared, depressing housing and weakening the economy.

Anatomy Of A Mid-Cycle Slowdown
Executive Summary: Investors still have plenty to fear. But our earnings and economic data analyses plus recent stock market action tend to support our relatively constructive outlooks for the economy and stock market (especially relative to the fears). … Specifically, we think the S&P 500 likely hit its bear-market low of 3666 on June 16 and will remain range bound between 3666-4150 pending economic improvement; the peaking of inflation should limit further valuation downside. … As for the economy, we think it’s undergoing a mid-cycle slowdown that could flatten expected earnings growth—but not a conventional recession that causes earnings to tank.

Financials, China & Russian Gas
Executive Summary: Banks have been navigating rising interest-rate seas remarkably well, managing to keep low the interest rates they pay out on deposits and raise the rates they take in on loans. As a result, net interest margins have been improving nicely from last year’s depressed levels. If banks can keep that up, the income upside would be substantial. … Also: China may regret not opposing Russia’s war in Ukraine if emerging market nations, struggling under the burden of war-induced food and energy inflation, aren’t able to make good on their debt payments to China. … And: A timely look at innovative ways to generate and store energy.

The Dollar & Earnings
Executive Summary: Although Fed officials rarely discuss the US dollar’s impact on the economy, the dollar’s recent strength does exert an impact comparable to some degree of interest-rate hiking. Ditto the Fed’s latest quantitative tightening program, QT2. Both effectively will lower the federal-funds-rate endpoint of this tightening cycle. … The dollar’s recent strength reflects massive inflows into US financial markets from overseas given the troubled economies most everywhere else. So we continue to recommend a Stay Home investment strategy for US investors. … How does the dollar’s strength affect corporate earnings? There’s no rule of thumb to go by, but with S&P 500 companies deriving about 40%-50% of their revenues and earnings from abroad, the impacts can be significant.

More On Inflation
Executive Summary: Consumer prices, wages, home prices, rent: They’ve all been surging northward at stunning rates. Today, we take a deep dive into the wage-price-rent spiral. … We examine recent rent data, how they’re measured, and the forces that drive them—such as the plummeting affordability of home purchasing. … Regarding wages, one measure suggests wage inflation may be moderating, while the other shows it is still very high. … We still expect inflation to moderate, led by nondurable and durable goods inflation. The risk is that the wage-price-rent spiral continues, forcing the Fed to trigger a recession—which always has brought inflation down in the past.

Bear Market Rally Or A New Bull Market?
Executive Summary: What’s ahead for the stock market? That depends on the significance of the S&P 500’s June 16 low-to-date in the current bear market, of 3666. If that turns out to be the bear’s bottom—which sure would be freaky since the previous one was at S&P 500 666—then either a bull market or a sideways-drifting one is just ahead. Alternatively, deeper lows may be in store if the gain since June 16 was just a short-covering rally within a bear market (as the reversal in sector leadership suggests). … Today, we examine both the bull and bear scenarios, laying out the cases for each.

Europe Sans Gaz (ESG)
Executive Summary: Russia’s not above weaponizing its natural gas supplies to European nations; it has already frozen out Denmark, Poland, Bulgaria, and Finland in retaliation for decisions Putin didn’t like. So does Russia’s recent close-down of Nord Stream 1 for “repairs” mean that the pipeline critical to heating Germany this winter won’t be reopening? Jackie looks at the potential for an energy crisis in Europe and how various nations might fare. … Also: China faces mountainous economic challenges of its own. … And: With electric vehicle prevalence forecast to skyrocket this decade, an important new industry is born—lithium battery recycling.

Earnings, Inflation & Europe
Executive Summary: Industry analysts are starting to lower their earnings estimates for some of the companies they follow. They aren’t doing so because they suddenly see an imminent recession but rather profit margins getting squeezed. …We don’t expect this morning’s June CPI release to show a peaking of inflation just yet. July’s CPI should do so. We see inflation moderating during the second half of this year and further in 2023. … Also: A peek into the world of Europe’s credit markets. These markets have been buffeted lately, first by the ECB’s hawkishness, then by its reassurances of help for the most indebted of the Eurozone’s nations.

Thumbs Up or Down For Q2 Earnings?
Executive Summary: Ready for the earnings season? Investors have been fearing a recession since this year began, as depressed stock valuations attest, while industry analysts have catapulted their earnings and revenues estimates to record highs. There’s certainly no recession evident in forward revenues or forward earnings. … We think Q2 earnings calls will be full of examples of inflation boosting companies’ results and the Fed’s response to inflation not yet depressing them. However, the strong dollar and weaker global economic growth will weigh on earnings. Today, we provide a sector-specific rundown of issues that we expect to hear a lot about on Q2 earnings calls.

Reassessing the ‘Banana’ Scenario
Executive Summary: Is a recession imminent? Is it here already? How big an impact will it have, if it comes, when it comes? The dreaded “R” word has everyone in a tither, and so does the weakness in the LEI. But the CEI suggests everything’s just fine. We recap the latest economic releases and how they’ve led us to the subjective probabilities we assign to four alternative economic scenarios. … We also assess how well peaks in the S&P 500 presage recessions. … And: The stock market may have hit its bear bottom already according to the Da Vinci Code, if inflation is peaking and that tempers the Fed’s hawkishness. Also: Dr. Ed reviews “Staircase” (+ +).

China, Earnings & Batteries
Executive Summary: China’s stock market has enjoyed a nice bounce this year as President Xi’s policies have grown more business friendly as the Chinese Communist Party meeting approaches. We remain concerned about the heavy debt loads forcing Chinese real estate development companies to restructure. We’re also watching Covid cases and Chinese exports to the slowing US and European economies. … We also take a look at which industries’ consensus earnings have been revised down by analysts so far this year. … Electric vehicles may emit less CO2 than internal combustion engines, but manufacturing and disposing of lithium batteries is an awfully dirty business.

A Recession: To Be or Not To Be?
Executive Summary: The latest batch of leading economic indicators suggests weaker coincident indicators to come. As a result, we’re raising our odds of a shallow, short-lived recession in the US economy to 55% (from 45%). That makes a recession now our base-case scenario from which we derive our earnings and stock market forecasts. … Higher recession odds lower our expectations for what S&P 500 companies will earn, what investors will pay for their stocks, and where the S&P 500 price index may stand at year-ends 2022 and 2023. … Also: Melissa looks at the factors contributing to global food inflation and the regions most vulnerable to food shortages.

The Second Half of 2022
Executive Summary: The US economy is probably heading into a mild recession, recent indicators suggest. We now see real GDP contracting by 1.9% this year. … The good news: The recession should be over next year and should slow the rate of inflation in H2-2022 and 2023. The sooner the business cycle bottoms, the sooner the stock market will. … Analysts will be getting the recession memo shortly and cutting their estimates accordingly. We’re doing so now, lowering our earnings estimates for S&P 500 companies this year and next.

Health Care, Finance & Batteries
Executive Summary: The S&P 500’s Health Care sector is pumped: It has outperformed most other sectors ytd and is tied for first place (with Utilities) measured since the S&P 500’s recent low on June 16. Jackie parses the opportunity, examining the investment pros and cons of the sector overall and of specific industries and companies within it. … Also: Which fintechs deserve master accounts with access to the Fed’s payments system? A couple of recent controversies put that question front and center as the Fed works on rules to govern the process of granting master accounts. … And: A look at where Tesla is going with its battery technology.

Relative Valuation & Dalio’s Big Short
Executive Summary: Around the world, as inflation concerns, interest rates, and recession fears have risen, stock market valuations have fallen. They’ll fall further if recessions actually materialize. Against this backdrop, we examine how the valuations of various indexes have fared relative to one another. … Also: For Europe, recession appears particularly likely given a brewing energy crisis, as Russia has been choking off natural gas supplies. Melissa assesses the ramifications for European households and businesses. … And: The ECB’s hawkish turn has hurt most EMU MSCI sectors’ valuations; we take a look at the deterioration relative to analysts’ still-strong earnings and margin expectations.

Right & Wrong Tracks
Executive Summary: This year’s first half has been treacherous for most investors; what will the second half bring? Today, we take stock of what’s going right for the economy and financial markets—and may be bullish over the rest of the year—and what could prolong the bearish pain. … Among the bullish: sentiment indicators’ contrarian buy signals, super-low joblessness, strong bank balance sheets, the “CFO Put,” and (counterintuitively) the Fed’s QT. … The main bearish scenario is a familiar fear: Inflation proves so intractable that the Fed tightens to the point of recession, which sets off a credit crunch. And that’s not all that could morph bearish.

Green Bad Deal
Executive Summary: The best laid plans of climate activists have gone majorly awry: Soaring fossil fuel prices haven’t increased demand for and supply of “clean” energy sources, as they’d expected, while demand for fossil fuels exceeds supplies. And activists’ pressure on European governments to suppress production of fossil fuels has really backfired, creating an unholy dependence on Russian oil with dangerous geopolitical ramifications. As a result, fossil fuel sources are making a remarkable comeback. … Also: US analysts still haven’t gotten the recession memo, blithely raising estimates even though investors and managements alike are girding for the worst. Even analysts overseas have on rose-colored glasses, particularly in Europe where the risk of a recession is rising as energy shortages worsen.

Energy, EVs & Crypto
Executive Summary: The price of oil has begun to come down. But countervailing forces are exerting both downward and upward pressure on oil prices. Among the former, production has ramped up greatly. Jackie examines the dynamics affecting oil industry pricing. … And: Electric vehicles are gaining traction in the marketplace. But they’re costing more to make with commodity prices so high and costing more to buy with manufacturers passing their cost increases onto consumers. … Also: Many of the many cryptocurrency players are bound to succumb to hypothermia during the brutal industry contraction dubbed “crypto winter.”

The Latest Business Cycle
Executive Summary: The Census Bureau’s monthly “Manufacturing and Trade Inventories and Sales” report is chock-full of valuable information that often goes unnoticed by the media and economists alike. Last week’s release, with data through April, shows inventories starting to rise relative to sales, especially among retailers. That implies good and bad news—good for constraining inflation, bad for economic growth, increasing the risk of a goods-led recession. … And: With global inflation surging, are the major global central banks tightening with Fed-like fervor? Not exactly. Melissa examines the unique issues in Europe, Japan, and China that are tempering their monetary policy responses.

Revisiting Venus and Mars
Executive Summary: “What planet are you from?,” analysts and investors may be wondering of each other these days, with the former super bullish and the latter super bearish. Analysts weren’t bullish enough about Q1 earnings. Yet investors are solely focused on the recession risk as the Fed fights inflation and have been pounding down valuations. … Barring a recession, the S&P 500 appears fairly valued, though we look today at a couple of still concerning valuation models. And of course, the odds of a recession aren’t trivial. … Also: The MegaCap-8 stocks are no longer “the Magnificent 8”; we examine their rise and fall. … And: Dr. Ed reviews “Jurassic World: Dominion” (- – -).

Damage Assessments: Stocks & Crypto
Executive Summary: Ready for an unflinching look at the mauling the bear market has inflicted on specific S&P 500 sectors and industries? Jackie assesses the valuation and share-price carnage among the worst and best performers relative to both one year ago and January 3, when the S&P 500 peaked at its record high. … Also: Crypto lending markets have blown up for the second time in as many months. We look at the unregulated business that’s been called the “Wild West” of lending—the players, their troubles, and the SEC’s concerns. … Also: Car-sharing companies like the soon-to-be-public Turo aim to disrupt the car rental industry with an Airbnb-like business model.

It’s Fed Day!
Executive Summary: Now that May’s CPI report has dashed hopes that inflation has peaked, it’s clear to investors that tethering inflation will take more aggressive tightening by the Fed. Today we will find out if the FOMC has decided to put more muscle into the fight. Will Powell show the same conviction to stay the course as his predecessor Volcker did decades ago? This may be Jerome Powell’s Volcker Moment. … Also: We look at what various Fed officials have said recently about the battle against inflation. … And: Tuesday’s inflation numbers mostly showed that inflation isn’t getting worse, but it isn’t getting better either.

Bull Market, R.I.P.
Executive Summary: The S&P 500 breached bear market territory yesterday, and this week’s economic releases could drive the index deeper into bear terrain by highlighting the persistence of the inflation problem. … Bear markets nearly always are accompanied by recessions. But while we did recently raise our odds of recession to 45%, we’re still not in the recession camp; notably, analysts’ earnings expectations are still rising to record-high levels. Our higher recession odds combined with the unfolding bear market have lowered our sights for the S&P 500’s valuation multiple and price index for the rest of 2022 and for 2023.

That ’70s Show On Fast-Forward
Executive Summary: May’s CPI report showed scant signs of inflation peaking, though we still expect peaking soon. The report also suggests a more hawkish Fed and higher recession risk. We’re raising our odds of a mild recession to 45% from 40%. … Investor and consumer sentiment both have soured. But this time, pervasive bearishness may not be as useful a contrarian bullish signal as in the past. There may not be much upside for stocks until the Fed is done tightening later this year. … Also: We revisit the question of the decade: Will the 2020s resemble the Great Inflation of the 1970s or the Roaring 1920s? … And: Dr. Ed reviews “Gaslit” (+ + +).

Energy & Consumers
Executive Summary: President Biden says he wants to bring down gas and other energy prices. But his actions on the margin have been ineffectual so far. We doubt he’ll solve the problem without unshackling the US oil and gas industry’s production. Environmentalists wouldn’t be happy, but American citizens likely would. … And: We’re starting to notice industry analysts trimming earnings estimates for companies in the S&P 500 Consumer Discretionary sector. We examine which industries have seen estimates drop the most. … Also: A look at some innovative new products for these high-energy-cost times.

Whip Inflation Now!
Executive Summary: There’s no disputing it anymore: America’s inflation problem isn’t transitory. It has been persistent. The question now is whether it is protracted or not. Biden’s response to “our top economic challenge” is lame. … On a brighter note, we expect the release of May’s CPI report on Friday to show that consumer durable goods inflation is rapidly moderating. On a dimmer note, that positive should be partially offset by the unabated climb of prices for gasoline, groceries, and rent. … Also: Europe’s economy has been remarkably resilient in the face of its formidable challenges. Melissa examines the headwinds and tailwinds for Europe’s economy and MSCI index.

Jamie’s Hurricane
Executive Summary: Jamie Dimon spooked the financial markets last week with his forecast of an economic hurricane headed straight for us. Today, we take a balanced look at Dimon’s three big worries—the Fed’s quantitative tightening bursting financial asset bubbles, the Ukraine war driving commodity prices skyward, and consumers using up their stimulus savings. … Our perspective: Don’t be alarmed by the metaphor; hurricanes come and go. What matters is their magnitude, which Dimon admits is unknown. … However, the term “self-fulfilling prophecy” is bound to apply to some extent when the head of the nation’s largest bank says it’s going to batten down the credit hatches to prepare for a storm.

Altitude Sickness
Executive Summary: As analysts’ earnings estimates have scaled new heights this year, investors have experienced valuation altitude sickness, which may soon be resolved by the drop in P/Es since the start of the year. Or it may resolve in a much more sickening fashion if a recession sends earnings expectations—and valuations—hurtling downward. …. A recession still isn’t our base case; we give it 40% odds. Notably, our forecasts for S&P 500 earnings and price targets assume that no recession is coming anytime soon. … To us, the latest economic indicators suggest a slowly growing economy headed for a soft landing, not a hard one. … Also: Wage inflation may be peaking.

Oil Trade & AI
Executive Summary: Ever wonder why the US is still dependent on oil imports even though fracking has boosted the amount of oil produced domestically to about the same as that consumed? And with that being the case, why does the US bother exporting oil anyway? The answers involve both a mismatch between the kind of oil America produces and consumes as well as a 100-year-old shipping law that has outlived its usefulness. Eliminating the Jones Act could not only help the US oil industry but could also revive US shipping and improve supply chains. … Also: How Nvidia and others hope to capitalize on AI and high-performance computing.

Braking Energy & Breaking China
Executive Summary: The Biden administration’s energy policy is worrying us. The plan it’s pursuing—a.k.a. “the transition”—is to pry Americans off fossil-fuel dependence by forcing up oil and gas prices. Such a crude plan is bound to have unintended consequences that put the overall economy at risk. Notably, the past six pre-pandemic recessions coincided with rapidly rising oil prices. This is one of the reasons that last week we raised our odds of a recession scenario to 40% from 30%. … And: More investors are agreeing with us that China is uninvestible. Amid economic woes, some self-inflicted, China is losing its foreign investors. We take a look at what’s scared them away.

Valuation Meltups & Meltdowns
Executive Summary: Valuation is in the eye of the beholder, but the economic outlook that influences it isn’t as subjective or hard to forecast, with lots of data available to help. … We think forward P/Es may be range bound this year and next and the S&P 500 may remain volatile below its January 3 high before climbing to new highs in 2023 and 2024. … Recession fears are weighing on valuations. We raised the odds of a mild recession to 40%, up from 30%, last week and again explain why. … Also: We discuss the variables suggesting a moderation of inflation ahead, led by consumer durables. … Finally: Dr. Ed reviews “Benjamin Franklin” (+ + +).

Energy, Retailing & Hydrogen
Executive Summary: Spending on stuff was so yesterday. Long-cooped-up consumers now want to spend on experiences and have fun! Not even stratospheric gasoline pump prices will keep them home this holiday weekend. Today, Jackie examines the factors driving energy prices skyward. … Also, some retailers’ Q1 earnings reports revealed a have/have-not dichotomy in the consumer discretionary space. Specifically, high-end Nordstrom made out far better last quarter than did retailers to the masses. … And: An update on the expanding use of hydrogen to fuel trucks, trains, and even factories.

The Recession Question: Raising the Odds to 40%
Executive Summary: Might the only recession we have to fear be one triggered by recession fear itself? It’s possible that we could talk ourselves into one. So while we still expect the economy to grow through the end of next year, we are raising the odds we assign to a recession scenario from 30% to 40%. That lowers our stock-market sights for this year and next. … We have new estimates for S&P 500 revenues, earnings, profit margins, P/Es, and price targets, which we still see at a new high late next year. … Also, we explain what has caused recessions in the past and why we don’t see those dynamics developing now. We’re far from alone in our optimism: Analysts keep raising their earnings estimates, and insider buying has been on fire.

Bear Anatomy
Executive Summary: History and data offer perspective into what a prospective bear market in the S&P 500 may mean for investors. Today, we examine the past two bear markets’ longevity, quantify the index’s valuation slide to date from its peak, compare component indexes’ performances, and see how much better global stock markets have been faring. … Also: Rapidly rising rent inflation will offset some of the improvement we expect in several other categories of consumer prices. Perversely, the Fed is putting upward pressure on rents by reducing the affordability of buying homes.

Bear Spray
Executive Summary: Today, we zero in on stock market bears—why they’ve been wrong for 13 years (quantitative easing), why they’re right currently (quantitative tightening), and why we believe their outlook is too pessimistic. … Primarily, we don’t expect an imminent recession because conditions aren’t ripe for a credit crunch. Additionally, the recent tech stock weakness is no Tech Wreck 2.0; inflation, looking peakish already, won’t prove intractable; and wage pressures are stoking an economy-boosting productivity boom. … We stand behind our “Roaring 2020s” scenario following a brief interlude in the 1970s. … We’ll be taking bear spray to Yellowstone. … Finally, Dr Ed reviews “Downton Abbey.”

Retailers, Materials & Fintech
Executive Summary: First the good news: Retail sales rose solidly in both March and April. Now the bad news: Two retail giants missed their Q1 earnings marks, causing recession-fearing investors to jettison their stocks. Jackie recaps what their management teams had to say about the quarter. … Also: With recession fears running high among investors, why is the S&P 500 Materials sector in their good graces? It has outperformed the market and most other sectors ytd. Within Materials, we focus on one industry with a shiny outlook, Steel, and a single member, Nucor. … Also: A look at Walmart’s foray into fintech.

Analysts Are from Venus; Investors Are from Mars
Executive Summary: Industry analysts are accentuating the positives of inflation; they’ve been raising their revenues and earnings estimates in response to it all year long. Investors are accentuating the negatives of inflation; they’ve been dropping how much they’re willing to pay for estimated earnings all year long. A recession would prove the investors right, but that’s not our expectation. … We see stagflation ahead, with a slowly expanding economy and slowly moderating inflation. … And: Melissa recaps the UN FAO’s disconcerting analysis of Ukraine war impacts on global food inflation and hunger. … Also: How certain recent Biden administration actions may unwittingly exacerbate both.

Run(off) for the Hills?
Executive Summary: It begins next month: the Fed’s plan to let its maturing securities run off its balance sheet without replacing them—a.k.a. quantitative tightening (QT). How right are investors to be freaked out? How legitimate are their suspicions that the Fed is erring on the side of overkill after having lost ground in the fight against inflation? … Today, we separate the fears from the facts and assess the likely impacts for the federal deficit, fixed-income markets, the stock market, and the economy. … Also: We lay out the runoff plan, review the last QT episode for insights, and put investors’ fears into perspective.

Waiting for Something To Break
Executive Summary: After many years of ultra-easy monetary policy, the realization that it’s going away has frightened investors to a degree unprecedented this early in a tightening cycle. The pre-tightening fear alone burst plenty of speculative bubbles, yet no dreaded credit-crunch/recession scenario has materialized. True, the inflation genie isn’t back in the bottle yet, but we expect it will be in coming months and without crashing the economy. … The Fed’s recently released Financial Stability Report was sanguine as well. … But our soft-landing scenario is a contrary one. So we’re keeping our eyes peeled for signs of both the recession that we don’t expect and the peaking of inflation that we do. … Also, we review “Ozark” (+ + +).

Tech Wreck, China Syndrome & Crypto Crash
Executive Summary: Investors aren’t cutting tech stocks any slack these days. Jackie looks at how the mighty have fallen, with focus on two tech highfliers whose Q1 earnings didn’t make the grade. … The fallout from China’s Covid lockdowns is inflicting damage on sector after sector of the Chinese economy, with no end in sight. The government is stepping in with support programs for businesses and the unemployed. … Also: The innovation once hailed as an inflation hedge has proved to be anything but. Cryptocurrencies have shrunk in recent months to a shadow of their former value. The stocks of companies working in the crypto industry have been clobbered as well. TerraUSD breaks the buck, and investors flee the not-so-stablecoin.

More on Inflation & Stocks
Executive Summary: The S&P 500 is undergoing a correction more persistent than the 72 panic attacks we’ve counted during this bull market, but will it become a bear market? The jury is still out. There is precedent for a valuation-led bear market despite stellar corporate fundamentals, during 1987. There was no recession that time, and the bear market was short-lived. … Is the real earnings yield as bearish as it seems? … Also: We look at what stock markets do during inflationary periods. … And: The collective voice of small business suggests the economy is in a stagflationary funk. … Finally: A look at what’s happening on Japan’s monetary and fiscal policy fronts.

Inflation, Bonds & Stocks
Executive Summary: Since 2008, the Fed’s quantitative easing had kept a lid on bond yields. But with the Fed now tightening—releasing bond yields to move solely by market forces—will yields be pushed above the inflation rate (where they usually reside)? A reversal from negative to positive real bond yields could trigger a credit crisis and recession; but we put the odds of that scenario at only 30%. Rather, we expect a soft landing for the economy, inflation moderating soon, and the Treasury bond yield marking time between 3.00%-3.25%. … For the stock market, high inflation boosts earnings yet depresses the valuations investors are willing to pay for those earnings. The lower valuations reflect investors’ fears that this will all end badly.

Inflation Peak-a-Boo
Executive Summary: We concur with Fed Chair Powell that getting inflation back to Earth needn’t crash our strong, liquid economy. The Bond Vigilantes aren’t as far behind the inflation curve as the Fed: They’ve already tightened credit conditions in the financial markets significantly. We expect inflation to peak this summer between 6%-7% and to recede to 3%-4% next year with no recession. … We may have spotted the first signs of peaking inflation already, in lower three-month than y/y rises of several price and wage measures. … But there are certainly plenty of indicators that cast doubt on the peaking-soon scenario. … Also, a movie review: “Summit of the Gods” (+ + +).

Powell, Travel, Forward Earnings & Quantum Sensors
Executive Summary: Investors liked the middle-of-the-road approach Fed Chair Powell laid out after yesterday’s FOMC meeting. We did too. … Travel-related industries are booming! Their Q1 earnings calls were brimming with optimism. Yet investors seem to have missed the memo: The share price indexes of most travel-related S&P 500 industries have plunged ytd ..: And it’s not just a travel thing: Most industries are seeing disconnects between earnings prospects and share price performance. Someone’s wrong: Either industry analysts are too optimistic in their estimates or investors too pessimistic about valuations. … Also: A developing technology with diverse potential uses: quantum sensors.

Fed Set To Hike By 200 Basis Points
Executive Summary: The financial markets have thoroughly discounted the Fed’s plan to raise the federal funds rate incrementally by a total of 200bps, so why not dispense with the increments and go for it? That’s not in the Fed’s data-dependent DNA. … Today, we examine the case for investing in bonds: The Fed is bound to tame inflation one way or another. If inflation drops back to 3.0%-4.0% next year and 2.0% in 2024, as we expect, then a 3.00% 10-year Treasury bond yield is quite interesting. … Also: A look at the ECB’s policy playbook, which is much less hawkish than the Fed’s.

Too Much Pessimism?
Executive Summary: To look at analysts’ record-high and rising estimates for the companies they follow, you’d never guess that investors are sweating bullets over prospects for the US economy. But are their fears of imminent recession justified? Today, we tackle that question, assessing both the negatives that investors are accentuating as well as the positives that some economic indicators are signaling. Importantly, the US economy is shipshape. … And we remind readers: Corrections, such as the S&P 500 is in now, tend to turn into bear markets only when investors’ recession fears materialize; when they fail to, valuation multiples tend to rebound.

The Big Leak
Executive Summary: Spooked investors have driven valuation multiples down to the low end of our projected range and deposited the Nasdaq in a bear market and the S&P 500 back in correction territory. … Today we examine the causes and effects of global inflation. … Excessive US fiscal and monetary stimulus ignited the US inflation conflagration by triggering a demand shock that triggered a supply shock. When much of the stimulus leaked abroad (confirmed by trade data), it fueled global inflation. … Inflation has been deflating consumer spending on goods but not on services. But soon we expect durable goods inflation to peak and drop. Inflation has a history of being spikey. … Finally, movie review: “WeCrashed” (+ + +) is about WeWork, not the stock market.

China, Tech & Electricity
Executive Summary: With nearly a quarter of China’s people locked in their homes by strict Covid policies, China’s economy is suffering, its policymakers are reacting, and ripple effects are spreading throughout the globe. Today, we examine some of these effects on US companies with business ties to China and on financial markets. … Also: Investors have sent tech stocks to the doghouse, their collective performance down nearly 20% ytd, and the MegaCap-8 hasn’t been spared. Indeed, Netflix and Meta are down 67% and 46% ytd. … And a look at virtual power plants, making electricity demand as adjustable as solar/wind supply is intermittent.

Inflated Economy
Executive Summary: Inflation is inflating corporate revenues: All 11 sectors of the S&P 500 boast rising forward revenues ytd, eight of them to record highs. It’s also inflating nominal economic growth even as real economic growth slows. This is bullish for earnings provided that companies can keep offloading higher costs to customers via pricing and provided that no recession comes along to stop that. … Also: We review the latest economic releases, which jibe with our stagflationary outlook for 2022. … And: The global food crisis. Food shortages and food inflation are bound to worsen, with dire implications for poorer nations around the world.

Waiting for a Break
Executive Summary: Investors are fretting that the Fed will slam on the monetary brakes, sending the economy hurtling down a ravine, but how legit are their concerns? Historical behavior of stock valuations and earnings estimates prior to feared and actual recessions offers perspective. Corrections usually reflect false alarms about impending recessions, whereas sustained bear markets reflect the real thing. … We also check more conventional leading economic indicators for perspective. … Plus: Fresh supply-chain disruptions resulting from China’s widespread lockdowns could trigger a recession there and potentially weigh on growth here. … And: We examine the latest stats on another of China’s homegrown problems: its birth dearth.

The Forces of Inflation vs The Forces of Deflation
Executive Summary: The stock market is correcting again, fear is rising again, and valuations are sagging under the weight of a hawkish Fed and rising bond yields. Yet consensus expected S&P 500 earnings continues breaking records. With 2022 shaping up as a volatile year for stocks, we anticipate a rally following the current selloff. … Also: Might “stayflation” frustrate the Fed’s 2.0% inflation goal? … We explain our view of inflation as a tug-of-war between four inflationary forces and four deflationary ones. … And: Treasury Secretary Yellen calls for a new world order featuring a “unified coalition of sanctioning countries,” the exclusion of pariah nations, and the “friend-sharing” of supply chains. Movie: “Inventing Anna” (+ + +).

LNG, Credit & Green Buildings
Executive Summary: Natural gas prices are higher than they’ve been in over a decade owing not to demand but supply issues. The crux of the problem: Europe’s need to find non-Russian sources of gas. Jackie reports on the factors that have been turning the screws on the natural gas market and looks at where the S&P 500 Energy sector stands after its huge runup. … Also: A look at how the high-yield, asset-backed, and municipal areas of the bond market are faring with the Fed in tightening mode. … And: Some innovative green buildings blur the lines between indoors and out.

Corporate Finance In Focus
Executive Summary: Today, we roll up our sleeves, lift the hood, and take a close look at the mechanics of corporate finance. … We show how corporate America’s record levels of profits and cash flow are deployed. … We also show how a lack of understanding of corporate finance has given rise to some blatantly false notions of progressives—e.g., that share buybacks drive better stock-price performance and that money used repurchasing shares and paying dividends detracts from what’s available to spend on workers and capital investments.

How Will the Fed Stop The Wage-Price Spiral?
Executive Summary: Can the Fed pull it off? Can it surgically subdue inflation without inflicting much collateral damage on the US economy? The now unanimously hawkish FOMC intends to try. Their current game plan seems to anticipate five increases of 50bps each, possibly at the next five FOMC meetings. … Meanwhile, we are on the lookout for signs of peaks in the latest inflation indicators; used car and truck prices are the first. … Rent and wages, on the other hand, are spinning upward along with prices in a mutually reinforcing spiral—calling into question the Fed’s optimism. … Also: A look at the causation loop between inflation and fiscal policy. … Movie review: “Super Pumped: The Battle for Uber” (+ + +).

Inflation, Semis, Banks & Grocery Shopping
Executive Summary: We’ve been on the lookout for signs of peak inflation, and we are deflated to report none to be seen in the latest PPI and small business survey releases. Instead, they telegraphed higher-for-longer inflation in a weakening stagflationary environment. … Semiconductor-related stocks have been beaten down ytd, but analysts expect double-digit earnings growth this year and next, aided by some fast-growing end markets. … Also: Expect smaller domestically focused banks to report stronger Q1 results than their big multinational counterparts. … And: Grocery shopping with no waiting in checkout lines or schlepping bags to the car? Yep: The supermarket industry is going high tech.

On the Lookout For Peak Inflation
Executive Summary: War, supply-chain disruptions, soaring labor and commodity costs, monetary tightening causing possible recession—pshaw! All the disturbing global and US economic developments of late haven’t shaken industry analysts’ confidence that their companies are headed for record revenues, earnings, and profit margins over coming months, as passing inflated costs through to customers has been a cake walk. Our analysis of forward revenues and earnings reveals that and more. … Also: We slice and dice March CPI data, inflation expectations, and wage inflation—ever on the lookout for “peak inflation,” which may show up in June or July. … And: Is the housing market cooling off?

TINAC: There Is No Alternative Country
Executive Summary: Why is the stock market defying the gravity of extremely grave situations? “TINA” may hold the answer: “There is no alternative” to stocks. … But now she’s been joined by “TINAC”—“there is no alternative country.” Global investors may be taking refuge in the US stock market as a safe haven in an unsafe world. … Today, we comparison-shop equity markets around the world and conclude that foreign stocks are cheaper but for several good reasons. … And: We look at why the US dollar is strong at a time of soaring commodity prices when usually the reverse is true.

Don’t Fight the Fed When the Fed Is Fighting Inflation
Executive Summary: The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe, which we peg at 30% and 50%, respectively. … The global economy is stagflating, indicators suggest. … Will reining in inflation take just a nudge from the Fed or an all-out recession-triggering shove? We hunt for the answer in FOMC officials’ recent views and the latest inflation data. … Also: The Bond Vigilantes are back in the saddle again. … And: Stock investors are trying not to fight the Fed as it fights inflation—which should make for a volatile but upward climb to our 2022 and 2023 targets. … Movie review: “Against the Ice” (+ + +).

Fed’s Hawks, China’s New Priority & Europe’s Gas Seekers
Executive Summary: The newly released minutes of the FOMC’s March meeting suggest that even the Committee’s long-time doves now are hawks. So expect upcoming rate hikes of 50bps, not 25bps. The Fed aims to tamp down inflation without igniting a recession; investors are skeptical, but we expect inflation will moderate later this year, bringing the doves back. … Also: Can China achieve its heady economic growth goals amid a Covid resurgence, strict lockdown policies, and all the economic disruptions caused by both? We doubt it. … And: A look at the odds arrayed against EU countries trying to wean themselves off Russian oil and gas.

Another Earnings Season Seasoned with Inflation
Executive Summary: Investors should have lots of questions for company managements during the upcoming earnings calls season. First-quarter macroeconomic and survey data paint a picture of modestly improving supply-chain problems but still high costs for manufacturers. For services providers, supply-chain and cost issues continue to strain their ability to meet demand. Profit margins should hold steady this year provided that price increases offset cost increases as we expect. … While earnings and revenue growth rates probably peaked during Q2-2021, analysts’ estimates suggest both remain solidly positive during Q1. … Also: Why the job market in Europe withstood the pandemic better than in the US.

Certainly Lots of Uncertainties
Executive Summary: There’s lots of uncertainty about what’s going to happen next in a slew of areas pertinent to investing, including whether the US economy is heading for a recession, how high inflation will go and what the Fed will do about it, how the world order is changing, and how to value stocks amid all this flux. The many unknowns have made for a volatile stock market so far this year. Today, we run through nine uncertainties that have been keeping investors guessing, sharing our analysis of each to shed what light we can. … Also: More on the “CFO Put”—the notion that corporations flush with cash are providing stock market support via buybacks, dividends, and M&A.

Inflating Earnings
Executive Summary: Crosscurrents should continue to buffet the S&P 500’s forward P/E multiple in both directions, but the earnings portion of the equation should rise in the higher-for-longer inflationary environment we project. The S&P 500 is a good inflation hedge provided that the downward-blowing crosswinds continue to be offset by inflating earnings. … Today, we detail all the variables that go into our stock market assessment—including our stagflationary economic outlook; our estimates for corporate revenues, earnings, and profit margins; our target ranges for the S&P 500’s forward P/E and price levels this year and next; and the assumptions we’ve made to derive those targets. … Movie review: “The Dropout” (+ + +)..

Financials, Defense & Fusion
Executive Summary: Today, Jackie takes a timely look at prospects for the S&P 500 Investment Banking & Brokerage industry. If the buoyant reception investors gave to Jefferies’ challenged but better-than-expected Q1 results is a bellwether, the industry may be poised to reverse its sector-lagging streak. … Also: A look at how the fiscal 2023 defense budget may take shape as it winds its way through Congress. … And: Fusion holds immense promise for producing carbon-free energy—if scientists can clear a big hurdle. They’re making progress.

It’s Still a Bull Market
Executive Summary: March 8 may have marked the stock market’s bottom for this year; it now seems rapidly to be approaching a new record high as investors turn to stocks as an inflation hedge. The fog of war had masked the outlook, but the long-term bull market, punctuated by panic attacks, remains intact. We peg the S&P 500’s upside potential at 5000-6000 next year. … Also: We examine how the S&P 500 has performed historically during ups and downs of both the business cycle and the monetary policy cycle. … And: Melissa examines the economic toll Putin’s war is taking on Europe and how European policymakers are responding.

Three Related Delusions
Executive Summary: The ripple effects of three delusions held in high places have triggered a host of interrelated global problems. Putin’s delusion about Ukraine’s sovereignty has led to war and related supply shortages of crucial commodities, which are exacerbating runaway inflation. … Powell’s delusion that the inflation outlook is more benign than it really is has misled bond investors. … But the bond market is finally shedding its delusions and acting more predictably. … How high might the 10-year Treasury bond yield go during this year of rising interest rates and stagflation? We project 3.00% by year-end.

Twists & Turns of the Yield Curve
Executive Summary: Two different yield-curve spreads are sending contradictory signals, and one of them is giving some investors the recession heebie-jeebies. But the other, more “official” yield-curve spread suggests no recession in sight, and ditto most other leading indicators. We see a stagflationary environment this year, with real GDP growing an average of 2.0% per quarter and inflation remaining persistent. … Also: A couple of short-maturity spreads relative to the federal funds rate likewise signal no recession. And we look to the Fed for insights on its chances of executing a soft landing and on the significance of various spreads.

Cybersecurity, Transports & Food
Executive Summary: Corporate America’s cybersecurity budgets are bound to rise after the White House warned that Russian cyberattacks appear imminent and briefed the likely targets. So Jackie examines the implications for cybersecurity software providers. … Also: The transportation industries—rail, truckers, and airlines—are staring up a mountain of challenges. Yet the S&P 500 Transportation index has been outperforming the broad S&P 500 index so far this year. … And: The Ukraine war is highlighting vulnerabilities in global food distribution systems. Vertical indoor farming could be part of the solution—eventually.

War & Peace
Executive Summary: Horrific as it is, Russia’s war in Ukraine hasn’t stopped the US stock market from advancing; investors know that geopolitical crises can present buying opportunities. The war has had significant impacts on commodity prices, inflation expectations, and certain stock market sectors. … The Energy and Materials sectors are benefiting from analysts’ higher revenues and earnings sights, and so are companies generally. Faster inflation is boosting revenues expectations to record highs, and the fact that earnings are following suit suggests most companies are able to pass their higher costs on to customers. … Also: For auto makers and their suppliers, the war is escalating already extreme supply-chain challenges and upending the global playing field in multiple ways.

More Inflationary Developments
Executive Summary: No matter how Putin’s War is resolved, the global world order will continue to face new challenges by the autocrats governing China, Iran, North Korea, and Russia. These Axis of Evil countries won’t stop trying to upend the post-WWII order established and implemented by the US. We look at the ramifications of that reality for globalization, inflation, and the investment outlook. … Also: New kinks in the supply chain mean that supply disruptions won’t be abating anytime soon, which will only increase inflationary pressures. … And: Powell’s speech yesterday confirmed his new, more hawkish stance. But an important yield-curve spread may be on the verge of inverting.

A Very Brief History of The Rise & Fall of Modern Monetary Theory
Executive Summary: Now that the Fed is tightening, US monetary policy is no longer bullish for stocks; the “Fed Put” is dead. Replacing it: the “CFO Put,” i.e., the market-buoying activities of corporate CFOs. But the tug-of-war between bearish and bullish forces may not be won decisively by either side in coming months; we see a volatile sideways-trading S&P 500. … Yield-curve inversion fears are misplaced. Inversion doesn’t cause a financial crisis/credit crunch/recession scenario but predicts one. And more convincing predictors are flashing no-recession signals—including the Fed’s lack of inflation-fighting gusto. … Also: Policymakers implemented Modern Monetary Theory during the pandemic, revealing the folly of the theory.

Peace, Defense & the Metaverse
Executive Summary: Hopes of a ceasefire in Ukraine have buoyed the stock market; but what comes after a ceasefire? Geopolitically, we expect a new world order to emerge. For the S&P 500, we see valuations pressured by higher-for-longer inflation and the Fed’s lame response. But for now, Panic Attack #74 is probably over… The Fed’s baby-step tightening move yesterday shows it’s in no hurry to corral inflation. … Also: Jackie examines the rising defense-spending plans domestically and abroad, the companies that would benefit, and the implications for the S&P 500 Aerospace & Defense index. … And: South Korea invades the metaverse.

Wage-Price-Rent Spiral
Executive Summary: Company fundamentals have been scaling dazzling new heights since mid-2021, yet stock market valuations have toppled ignominiously from their 2021 peaks last spring. That disconnect reflects a tug of war between the opposing effects of high inflation and excess M2 liquidity on valuation multiples. … We have two big concerns about higher-for-longer inflation: Rent inflation is getting uglier, and the wage-price spiral is spiraling faster. In fact, we now see potential for a wage-price-rent spiral. … And: Melissa examines why rents have gone through the roof.

Wage-Price Spiral Spiraling
Executive Summary: Today we examine Putin’s War from several angles: The ceasefire demands that Russia has put to Ukraine, the requests for assistance that Russia has put to China, and reasons for surging US gas prices. … We also examine runaway inflation from several angles: What the Fed could do about it, what it will likely do instead, and why the wage-price spiral won’t be stopping anytime soon.

Inflation, Liquidity & Valuation
Executive Summary: The big question before stock investors now is: With inflation likely to remain troublesome, are valuations still too high or will ample M2 liquidity keep them elevated? We examine a handful of indicators that shed light on the relationship between inflation and valuation. … Will chronic labor shortages fuel a wage-price spiral over the rest of the decade, as predicted by Charles Goodhart? Our money remains on businesses deploying productivity-enhancing technology to get around their labor-supply challenges. … And: Putin’s War should mean more gradual interest-rate increases ahead, for now. …Also: Dr. Ed reviews “Vikings: Valhalla” (+ + +).

Stagflation, Russian Oil & Gas, And Carbon Credits
Executive Summary: Stagflation—higher inflation with slower economic growth—may be upon us, suggests the NFIB’s February survey of small business owners. Most are struggling to fill open positions, which is perpetuating a wage-price spiral. Earlier this week, we raised our inflation outlook and dropped our GDP forecast—resulting in lower expectations for the stock market this year. … And: How will the US and Europe meet their energy needs with less reliance on Russian oil and gas imports? Jackie looks at this question from multiple angles. … Also: How is the EU carbon credit market weathering its first war? Spoiler alert: Not well.

Commodities Go Limit Up
Executive Summary: Is China’s President Xi able to stop Putin’s War? With high stakes for both China’s economy and its reputation on the world stage, he has every reason to try. The Dragon must restrain the Bear. … The CRB raw industrials spot price index typically peaks and troughs in lockstep with business cycles. This time is different: The CRB’s vertical ascent reflects not booming global demand as usual but looming supply crunches. … And: Blocking Russian exports from global markets will mean painful supply constraints for the rest of the world, not only of oil and gas but also of metals and agricultural products.

Past & Future Earnings
Executive Summary: Today, we examine the fundamental data that drive the stock market, as just reported for Q4 and as projected by industry analysts and by us for this year and next. S&P 500 companies’ Q4 results show record highs for revenues and earnings, but the profit margin continued to edge down from the Q2 peak. … Our stagflation economic forecast prompts us to raise our S&P 500 revenue, but not earnings, estimates. We expect relatively flat S&P 500 profit margins around 13% this year and next. … Also, we look at what declining forward P/Es have meant for the four major investment styles.

It’s a Mad, Mad, Mad, Mad World
Executive Summary: With the whole world at the mercy of Mad Vlad, the pandemic now seems like a walk in the park. A nuclear power plant catastrophe has been narrowly averted, but Putin’s war has melted down Russia’s stock market and currency. … For the US economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war. A recession can no longer be ruled out. … For stock investors, we think 2022 will continue to be one of this bull market’s toughest years. We’ve dropped our year-end 2022 and 2023 S&P 500 targets to 4000, a 16% decline, and 5000, a 25% rebound to a new record high.

Sentiment, Retailers, China & Crypto

Executive Summary: Bargain buying now for the long term may make sense, suggests the Bull-Bear Ratio and lessons from past geopolitical shocks. A caveat: This time may be different given coming interest-rate increases and the potential for disrupted energy markets. … Retailers’ recent earnings reports have been decidedly optimistic, but stock investors aren’t convinced. Why are they spooked when the C-suite folks are sanguine? … China’s President Xi may have a change of heart about former BFF Putin; we explain why we think so. … And: Cryptocurrencies’ new wartime uses.

The Case for a Ceasefire
Executive Summary: The Cold War is back on. What’s next in the hot war between Russia and Ukraine? Major considerations include whether Russia gains the upper hand militarily, the fact that it is losing much economically, and whether negotiations will provide an exit for both sides. … Longer term, Russia’s future is bleak if demography is indeed destiny. … And: What’s with all the slicing and dicing of apples and oranges that Fed banks do to understand inflation? We’d toss out most of the concoctions.

Inflation in the Second Cold War
Executive Summary: The end of the Cold War in the late 1980s was very disinflationary—perpetuating freer trade, greater global prosperity, and lower inflation. Will February 24, 2022 mark the start of Cold War 2.0 and with it the Great Inflation 2.0? To answer that, we look at the history of inflation from a geopolitical perspective before we examine four powerful constraints on inflation, the “4Ds”—some of which have been weakening. … Also: a look at what’s been keeping frackers from fracking more oil.

‘Stop the World—I Want To Get Off!’
Executive Summary: “Buy to the sound of cannons, sell to the sound of trumpets.” That advice worked on Thursday as Russia invaded Ukraine. What about that shocking day reassured investors enough to drive the stock market up? We take a look. … Also working that day was the Bull-Bear Ratio’s contrarian buy signal. … Economically, the war may bring heightened global inflation, more supply-chain disruptions, and possibly higher energy prices. For the US economy, stagflation could result, but we still don’t expect a recession. … And: Is madman Putin’s plan already doomed? … Finally, Dr. Ed reviews “CODA” (+).

Sentiment, Industrials, and Crispr
Executive Summary: Stock market bearishness is increasing, which is bullish from a contrarian perspective. The Bull/Bear Ratio has dropped close to levels that have heralded great buying opportunities in the past. That doesn’t preclude further stock market declines, but it does suggest that bargain buying for the long term makes sense. … A confluence of trends points to boom times for manufacturing industries and the businesses that support them. Some of these trends are industry specific, some apply to manufacturing broadly. … Also: a look at exciting new medical applications for disruptive technology Crispr.

Inflating Fundamentals vs Deflating Valuations
Executive Summary: The Ukraine crisis has triggered the stock market’s 74th panic attack of this bull market, by our count. Coming on the heels of the 73rd panic attack, the two together qualify as a correction. Could it become a bear market? Perhaps if much higher oil and gas prices result from the crisis, but that’s hard to conclude. What we do expect over the near term is more of the same sideways trading with volatile swings. Notably, however, geopolitical crises have often been buying opportunities for stock investors. … And while valuations have been deflating lately, fundamentals—revenues, earnings, and profit margins—have been inflating dramatically. … Also: What members of the “Federal Open Mouth Committee” have been saying about the course of monetary policy.

Pieces of the Economic Puzzle
Executive Summary: Are consumers more depressed about inflation or more optimistic about employment? Our Consumer Optimism Index, which captures both trends, stands well below pre-pandemic levels, suggesting the former. In fact, January’s strong retail sales may reflect inflation-driven behavior, i.e., the inclination to buy in advance of price rises. … We also examine what’s happening behind the data for industrial production, inventories, transportation, construction, capital spending, and trade. … And: What’s the Fed’s take on the inflation problem? Officials have abandoned the term “transitory” but apparently not the hope. We have only one word for that: “delusional.”

Insurance, Tech & EVs
Executive Summary: Visions of higher interest rates to come are stoking investors’ optimism about prospects for financial services companies, fueling the S&P 500 Financials sector’s impressive ytd outperformance. Within the sector, the insurance industry has been faring well by both earnings and share-price measures as pricing power and strong investment returns have helped to offset higher costs and losses. … Also: Washington has guns out for Big Tech; we recap recent regulatory and (bipartisan!) legislative initiatives afoot. … And we survey the playing field for electric vehicles after their starring roles in Super Bowl ads.

Will Inflation Persist Along With Labor Shortages?
Executive Summary: Putin must be day-trading oil futures. … Why the inflation story is one of countervailing forces: Consumers’ inflation expectations have been edging down even as price pressures continue to ramp up. Supply-chain disruptions should continue to ease as the pandemic abates, but labor shortages will persist for the foreseeable future. Wages and prices have been spiraling upward together recently, and productivity growth can’t improve fast enough to slow the wage-price spiral for now. … Also: As the world braces for a wave of monetary tightening after years of ease in the extreme, we examine which of the major central banks likely will make their moves when, and why.

Yes! We Have No Bananas
Executive Summary: With the Fed far behind the inflation curve and the yield curve spread rapidly narrowing, are fears of an imminent recession (a.k.a. “banana”) justified? For now, we’re singing the 1923 hit song with the ambivalent message “Yes! We Have No Bananas.” That’s because most indicators don’t point toward the prospect of a recession but a couple do: the fastest business cycle in history and inflation rates that could lead to a Volcker 2.0 scenario. We also consider what’s up with this yield curve. And we explain why we’re maintaining our long-standing recommendation to overweight US stocks in global portfolios.

Putin & Inflation Remain Persistent
(1) Putin says collapse of USSR was geopolitical disaster. (2) He wants to put Humpty Dumpty back together again. (3) War is imminent, maybe. (4) A message to other former Soviet states. (5) Higher oil prices, higher S&P 500 Energy stock prices. (6) Tweaking odds from 65/35 to 60/40 on Roaring 2020s vs Great Inflation 2.0 alternate scenarios. (7) No sign of peak in CPI, though base effect may still be having an effect. (8) More upward pressure on energy, metals, and food prices. (9) 1970s déjà vu all over again in some respects. (10) Fed has never been further behind the inflation curve, while hoping it will bend. (11) Paying the price for the Fed’s original sin. (12) Movie review: “Nightmare Alley” (+).

What’s in Style?
(1) Work in progress. (2) Overweight stocks and cash, but underweight bonds. (3) Key assumption: Inflation peaks soon. (4) Risk is it doesn’t. (5) Record negative real interest rates. (6) OMG moment ahead? (7) Cash for buying cheaper stocks and bonds. (8) The “CFO Put,” again. (9) Fundamentals still looking great. (10) Three favorite S&P 500 sectors. (11) The MegaCap-8 still have a huge influence. (12) Hard to overweight them. (13) SMidCaps are still cheap. (14) Why we are not fans of Growth vs Value. (15) Gentler robots.

Europe’s Cold Winter War
(1) Upward payroll revisions suggest Fed stayed easy for too long. (2) Small businesses facing labor shortages and cost increases. (3) No sign of a peak in NFIB prices index. (4) Europe needs Russian gas, and Russia needs European customers for its gas. (5) Is Germany a weak link? (6) Winter will be followed by spring and summer. (7) Russia likely to make good on contractual deliveries. (8) Nord Stream 2 trump card.

Anatomy of a Correction
(1) Invitation to register for video podcast on “Predicting Inflation.” (2) The latest mini-correction lasted 24 days. (3) Fed fooled by a few weak employment gains last year that were revised much higher. (4) When in doubt, predict volatility. (5) The most negative real fed funds rate since start of data in 1960. (6) Will the inflation curve bend? (7) Wage-price spiral would be nightmare scenario for the Fed, and investors. (8) Sentiment: more in correction camp than bear camp. (9) Lots of cash to fuel another record year for M&A. (10) Assessing the valuation correction.

Another Year of Living Dangerously
(1) Here is how the federal government mucked up the labor market and Fed policy. (2) Subsidizing unemployment creates more unemployment. (3) Lots of workers out sick during January. (4) Earned Income Proxy at record high, but inflation erodes its purchasing power. (5) Big upward revisions in payrolls. (6) Nearing full recovery in full-time jobs. (7) Early in a productivity growth boom ignited by chronic labor shortages. (8) Through a dark mirror and things that go bump in the night. (9) The cases for several bad happenstances. (10) Another oil shock combined with wage-price spiral? (11) Axis of Evil. (12) Movie review: “Help” (+ + +).

Coming Home
(1) Looking at positive possibilities. (2) An end to Covid, an unkinked supply chain, and peaking inflation. (3) More US manufacturing bulks up at home. (4) Billions earmarked for new semi plants. (5) Auto companies retooling old plants, building new ones. (6) Bills would offer enticements to onshore. (7) Small manufacturers jump on the trend, too. (8) Robots counter rising labor costs. (9) Stretch helps DHL in warehouses. (10) Introducing Elon Musk’s Optimus robot. (11) Robots pouring coffee and mixing cocktails at the Olympics.

Great-Looking Fundamentals
(1) January was bad for stock prices but good for their fundamentals. (2) Omicron didn’t infect analysts’ outlook for earnings. (3) Neither did supply-chain disruptions. (4) Both pandemic and supply problems may be receding. (5) Record highs, again, for S&P 500/400/600 forward revenues, earnings, and margins. (6) NRRIs and NERIs declining but remain positive. (7) M-PMI implies slower growth in revenues and earnings—and smaller stock gains. (8) Searching for hints of a peak in latest inflation data. (9) Rapidly rising home prices: Rounding up all the suspects. (10) Plenty of business for both single-family and multi-family homebuilders.

The Big Chill? Not!
(1) Blaming the slow-acting Fed for volatility. (2) The arithmetic behind our new S&P 500 targets. (3) No change in our outlook for revenues, earnings, or margins. (4) Lowering our forward P/E assumption. (5) Making the case for relatively high P/E. (6) A minor correction for the S&P 500, so far. (7) Businessweek cover showing bull buried in snow is bullish. (8) Home, sweet home. (9) Indecisive excerpts from Powell’s presser.

‘Humble & Nimble’
(1) The case for a neck brace. (2) The S&P 500 may have adjusted for this year’s tightening round, but we’re pushing 5200 target into early 2023. (3) Record forward earnings and profit margins for all major S&P indexes. (4) The air has come out of several speculative bubbles without serious consequences. (5) Three measures of sentiment. (6) BBR is bearish, which is bullish. (7) VIX in correction territory. (8) Credit yield spread remains calm. (9) Nothing new decided at latest FOMC meeting. (10) March FOMC meeting should be decisive. (11) The Fed’s runoff issue. (12) Soft landing ahead? (13) Movie review: “The Power of the Dog” (- -).

The Fed, Stocks & CBDC
(1) Fed Chair Powell fails to calm investors’ nerves. (2) Bracing for higher interest rates and balance-sheet reductions. (3) The cloud, 5G, and consumer spending boost earnings of Microsoft, Corning, and AmEx. (4) The average stock not down as much as index performance would suggest. (5) The MegaCap-8 stocks take their toll. (6) Athletes can try China’s digital currency—the e-CNY—at the Olympics. (7) The Fed is STILL studying a digital dollar. (8) Assessing the digital dollar’s impact on banks, monetary policy, privacy, and money laundering.

The Monetary Policy Cycle
(1) More on Panic Attack #73. (2) How is this taper tantrum different than the previous three? (3) From cooing doves to squawking hawks. (4) Tracking the Fed’s monetary policy cycle. (5) Bond yields rise during tightenings, fall during easings. (6) Yield-curve spread usually widens late during tightenings; this time, it’s been narrowing before tightening has even started. (7) Stocks have rallied before and early during tightenings. (8) The P/E tends to rise and fall as the federal funds rate falls and rises. (9) A déjà vu of 2000 all over again? (10) S&P 500 forward revenues, earnings, and margins all at record highs. (11) Tracking Covid around the world. (12) Learning to live with the pathogen.

(1) With benefit of hindsight, MAMU is dead. (2) Retreating speculative excesses is a good thing as long as nothing breaks. (3) Taking some air out of MegaCaps is also good for the long-term health of the market. (4) Lots of bearish sentiment in options market and in Bull/Bear Ratio. (5) Can the Treasury market absorb an extra $175 billion per month? (6) A short history of Quantitative Tightening. (7) Xi wants Powell to cease and desist. (8) Record-low births of Chinese babies in 2021. (9) World’s largest nursing home.

Superbubble Bursting or Just Another Panic Attack?
(1) Grantham’s superbubble. (2) Is the fourth superbubble bursting? (3) Back to 2500 on S&P 500? (4) Eight counterpoints. (5) The causes of bear markets. (6) The case against a recession. (7) Air is coming out of speculative bubbles without adverse economic consequences. (8) A correction in MegaCap-8 valuations. (9) Sentiment getting very bearish. (10) Geopolitical risks. (11) Panic Attack #73 is all about the Fed, and it might linger. (12) What does the Fed’s balance-sheet runoff mean for the Treasury and for liquidity? (13) Movie review: “Munich: The Edge of War” (+ +).

Jan 20, 2022

Meta’s Foes
(1) Throwing the book at Meta. (2) Meta keeps regulators around the world busy. (3) FTC antitrust case allowed to proceed. (4) Congress wants Meta and Big Tech to end anticompetitive practices and protect children. (5) State attorneys general target Meta too. (6) UK regulator requires Meta to sell Giphy. (7) EU considers the Digital Markets Act. (8) Lawsuit aims to sidestep Section 230. (9) Microsoft’s Activision deal should boost revenue and increase its gaming content. (10) Race to fill the metaverse with content. (11) Metaverse “land” prices skyrocket. (12) Walmart appears ready to jump into the metaverse, too.

A Very Brief US History Of the Postwar 1940s
(1) Winston Churchill and Mark Twain on history. (2) The best of times or the worst of times? (3) Factions, partisanship, and the Constitution. (4) The system works best when it doesn’t work for any one faction. (5) WWII was followed by labor strife, racial strife, and a red scare. (6) Inflation soared during the second half of 1940s. (7) Comparative inflations. (8) Meet Joe Manchin, again. (9) Sinema is in the same opposition party as Manchin. (10) Alternative outcomes for BBB.

Mega Valuation
(1) The valuation question, especially about the MegaCap-8. (2) Buffett Ratio off the charts. (3) Forward P/S well exceeds forward P/E because forward profit margin has been rising to new record highs. (4) MegaCap-8 forward P/S and forward P/E are elevated, but so are their margins relative to the rest of S&P 500. (5) Only three MegaCap-8 stocks are in tech sector of S&P 500. (6) Record worldwide demand for semiconductors. (7) US computer output at record high. (8) A whiff of stagflation last week. (9) Omicron less lethal, but spreads faster and disrupts business. (10) Retail sales weakness should be offset by inventory restocking. (11) Durable goods inflation not likely to persist, while rent inflation could do so. (12) Movie review: “Ray Donovan: The Movie” (+ + +).

Financials, China, and Wireless Charging
(1) Higher interest rates boosting Financials. (2) Commercial and investment bank stocks at or near highs. (3) Jefferies’ earnings disappointment spooks market. (4) Could SPACs be to blame? (5) China roiled by Covid shutdowns. (6) The push for Olympic blue skies disrupts plants in northern China. (7) China’s property developers still digging out from debt. (8) Keeping an eye on hypersonic missile developments in China and North Korea. (9) Pulling the plug on electricity outlets. (10) Wireless electricity transmission at home, in space, at the office, and on the road.

Earnings Season Starting
(1) Latest earnings reports should beat expectations again. (2) Real Q4 GDP tracking at 6.8%. (3) S&P 500 forward earnings at another record high. (4) Our latest forecasts for S&P 500 earnings and the stock price index. (5) Profit margins likely to stall at record high. (6) Consumers shopped and borrowed at solid paces during Q4. (7) Homebuilders seeing demand and raising prices. (8) US petroleum usage at record high. (9) Financials boosting profits by reducing loan-loss reserves. (10) Industrials experiencing record new orders, especially for capital goods. (11) Global M&A likely to continue to boom in 2022.

Is the Party Ending Or Just Moving?
(1) Drinking the Fed’s punch. (2) Party getting out of hand. (3) Fed will soon stop filling up the punch bowl, but there will be lots of liquidity left in there. (4) Inflation spiked by spiked punch. (5) FOMC minutes’ talk about paring Fed’s balance sheet shocks investors. (6) Bond Vigilantes no longer punch drunk? (7) Expected inflation is up, but prices-paid index is down. (8) Are rising bond yields so bearish for Growth? (9) No, but they are bullish for Financials. (10) Mag-8 accounts for almost 50% of Growth’s market cap. (11) When in doubt, diversify with Energy, Financials, and the Mag-8.

The Markets, the Fed, and Jobs
(1) Investors discounting more hawkish Fed. (2) A week of rotation from Growth to Value. (3) Growth P/E down, Value up. (4) Lots of chatter, again, about a great rotation. (5) Stay away from disruptive hyped-up tech stocks. (6) FOMC agrees: “Transitory” is out, “persistent” is in until further notice. (7) Discussing normalization. (8) Powell mentioned paring Fed’s balance sheet late last year. (9) Labor market is booming. (10) More full-time jobs replacing part-time ones. (11) Real wage rate stalls at record high. (12) Alternative wage measures. (13) Movie review: “King Richard” (+).

All Things Tech
(1) Checking out CES, virtually. (2) Autos are the new tech. (3) Semis introduce new chips as global sales keep climbing. (4) Check out Gallium’s new AR headset, an app for dog nose prints, and a digital frame for your NFTs. (5) Tech had a great 2021, but a rough start to 2022. (6) A look ahead at Tech industries’ earnings estimates. (7) SenseTime—China’s Google—is spreading around the world. (8) SenseTime’s facial recognition and AI expedite purchasing, fight Covid-19, and make cars smarter. (9) China may also be using it to track the country’s Muslim minority. (10) SenseTime’s shares rally after Hong Kong IPO.

Covid-19, Mag-8, And FOMC-19
(1) Powell’s pivot on inflation puts contrarians on alert. (2) Alternative bets. (3) M-PMI prices-paid index recedes. (4) Omicron and done? (5) The fastest-spreading virus on record. (6) The wild brushfire analogy for optimists. (7) Milder symptoms. (8) Herd immunity, here we come? (9) Cases soaring in US and Europe. (10) The Magnificent 8 were magnificent again in 2021. They might be again in 2022. (11) Growth isn’t cheap. (12) Rearranging the deck chairs on the USS FOMC. (13) Biden likely to choose more progressives to fill Fed vacancies. (14) Meet Sarah Raskin.

Bonds Have More Fun With Old People
(1) Enlightening students about “entrepreneurial capitalism.” (2) Will bond market conundrum persist in 2022? (3) Two-year Treasury note anticipating three rate hikes this year. (4) Gravitational pull of near-zero yields in Germany and Japan. (5) Bearish indicators for bonds remain bearish. (6) Age Wave remains bullish for bonds. (7) Chronic labor shortages should stimulate productivity. (8) Bond funds had record inflows in 2021! (9) Will the worst S&P 500 industries in 2021 be among the best in 2022? (10) Last year was another good year for Stay Home investors. So should be 2022.

Happy 2022!
(1) Santa outpunched the two Grinches. (2) Omicron spreading like wildfire, and could burn out quickly. (3) Biden hands the pandemic back to state governors. (4) The Fed should be done tapering by March. (5) Whose afraid of 75bps? (6) Yield curve says don’t fight the bond market. (7) Santa’s earnings-led meltup. (8) Fewer kinks in supply chain. (9) Lots of booming economic indicators. (10) Plenty of liquidity, which is more liquid than it was before the pandemic. (11) The case against Volcker 2.0. (12) Durable goods prices soaring after deflating for many years. (13) Rent inflation will remain troublesome. (14) Inflation may be peaking according to regional business surveys. (15) Movie review: “Being the Ricardos” (+ +).