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Morning Briefing Bullet Points & Chart Collections


View From The Pits
Executive Summary: Commodities markets have been on a wild ride in recent years, buffeted by pandemic impacts specific to each. The present time finds oil prices weakened by a global supply/demand imbalance, raw industrials prices depressed by China’s weak recovery and US recession fears, lumber prices down owing to soft single-family home construction, and both natural gas and most agricultural prices far from their peaks. … The ripple effects of this commodities scenario include downward inflation pressure and upward dollar pressure. … Also: Joe shares his takeaways from S&P 500 Q1 earnings now that most companies have reported and most analysts have tweaked their forecasts.

Slippery Slopes
Executive Summary: Oil prices are slipping notwithstanding Saudi Arabia’s production cuts, which aren’t as effective at halting such slides as they used to be. Too much global oil production capacity in the world relative to too little demand is the problem. … If oil prices are on a slippery slope, so is inflation; indeed, the latest inflation indicators suggest it is continuing to moderate. … As for the latest economic indicators, the NM-PMI and LEI are misleading. Their weakness doesn’t point to a broad-based recession. The forecast still looks like a rolling recession to us.

Executive Summary: Is all the AI euphoria leading the stock market into another “MAMU”—“Mother of All Meltups”? If so, our 4600 target for the S&P 500 by year-end might prove conservative, not controversial. This bull market began differently than most, with higher P/Es at the outset, and this MAMU’s timing would be different, early in the bull market versus late. … Lifting the economy has been “MAMA”—“Make America Manufacture Again.” Manufacturing capacity—flat since 2011—is about to expand given all the factory building implied by the 150% two-year surge in nonresidential construction of factories. Also: The job market refuses to land, but wage inflation is coasting lower. … Dr. Ed reviews “After Waco” (+ + +).

Tech, AI & Irises
Executive Summary: The stock price indexes of the S&P 500 Information Technology sector and its top-performing industry ytd, Semiconductors, have left their peers in the dust. Not only has the transformative potential of AI whetted investors’ appetite for tech; so have semiconductor companies’ rosier earnings outlooks now that they’re out from under their inventory glut. Does this tech rally have legs? We think so over the longer term, since earnings prospects are bound to rise as AI spending and the semiconductor cycle head north. … Also: Irises have caught our eye, specifically their potential for “authenticating humanity.” OpenAI CEO Sam Altman envisions that potential changing the world.

Another Hated Bull Market
Executive Summary: The S&P 500 has been in a bull market since October. So how come there are so many bears refusing to believe that? Today, we recount the reasons that they write off the stock market’s legitimately broad-based advance since fall as just a rally within a bear market. We also correct a few of their misperceptions and outline the bulls’ stronger case. … And for a trader’s perspective on this divisive market, a few words from Joe Feshbach.

Shock Absorbers
Executive Summary: Why is economic growth seemingly defying gravity, or at least the gravitational pull of the Fed’s tightening measures over the past year and change? It’s not that the rules of business-cycle physics are defunct. Rather, the pandemic has added new forces to the equation, with distortive effects. Eight unusual forces are acting as shock absorbers to keep the economy from sinking into the widely expected recession. Today, we examine each, including the amount of liquidity in the economy, the uncommonly strong labor market, productivity-enhancing technological advancements ushering in the “Roaring 2020s,” and well-heeled Baby Boomers consuming like there’s no tomorrow.

Covid Again? Upbeat NERI.
Executive Summary: China bracing for another Covid wave but will rely on vaccines rather than lockdowns. … Latest earnings was better than expected, but S&P 500 earnings was still down 3.0% y/y, which is better than the -7.0% consensus expectation. Q2 should be down again modestly before comps turn positive again. … Joe reviews the latest NERI readings, which seem to be turning more optimistic.

Around The World
Executive Summary: Global economic growth has been lackluster this spring, neither a boom nor a bust. Rebounding global trade and the easing of supply-chain disruptions should moderate global inflationary pressures without a global recession. The Fed and the ECB are committed to raising rates to restrictive levels and keeping them there to bring inflation down. The Fed’s rate is probably where it should be, while the ECB may have a couple more rate hikes to go. The BOJ’s ultra-easy policy continues. The PBOC is massively stimulating, suggesting all is not well in China. Today, we survey the major indicators of global economic growth for insight into how vulnerable the global economy is at this juncture.

Looking Forward To Better Earnings
Executive Summary: Our analysis of forward earnings—a good indicator for actual earnings over the next four quarters—suggests an April bottom. That jibes with our mid-cycle-slowdown thesis. … Many who expect a recession instead have been misled by the LEI’s recession signaling. The LEI overrepresents the weak goods side of the economy and underrepresents the strong services side that’s been keeping the economy afloat. … We think the forward profit margin, like forward earnings, has bottomed; margins have been improving for all but three S&P 500 sectors. … And: Still no credit crunch from the banking crisis. … Also: An update on bond market indicators.

Leading The Wrong Way?
Executive Summary: So where’s this recession signaled by the LEI and widely expected to come anytime now? Why haven’t high inflation and monetary tightening ground economic activity to a halt yet? Because a recession isn’t coming anytime soon. We never bought that it was inevitable anyway. We’re raising our subjective odds of a soft landing, instead of a recessionary hard one, to 70% from 60%. The burden of proof is now on the pessimists. … So what’s been keeping the economy from a textbook recession? Unusual forces are in play, acting as economic shock absorbers. … Also: Our Roaring 2020s boom-times thesis remains intact. … And: Dr. Ed reviews “Air” (+ +).

Retail, Earnings & Fintech
Executive Summary: Three major retailers recently reported Q1 results that provide a glimpse into consumers’ shifting spending trends. Notably, consumers seem to be putting off discretionary purchases. … Also: Perusing YRI’s forward earnings growth charts for S&P 500 industries is an eye-opening exercise: For four unrelated industries, analysts have set extremely high sights. Jackie explores. … And our Disruptive Technologies focus: Walmart’s self-reinvention as a financial services provider to the masses.

Earnings & The Economy
Executive Summary: While the stock market’s technical measures of breadth have been disappointing, two fundamental measures have been staging impressive V-shaped rebounds typical of early bull markets: the breadth of analysts’ consensus expectations for S&P 500 companies’ revenues and operating earnings. … Their message is confirmed by recent strength in S&P 500 forward revenues, earnings, and profit margins. … Joe provides a deeper look into what forward profit margins have been doing in recent weeks on S&P 500 sector and industry levels. … All these developments jibe with our soft-landing economic forecast. … So do the latest economic indicator releases.

Economic & Financial Stress & Stability
Executive Summary: Two different recent surveys taking the pulse of businesses—one measuring sentiment among small business owners nationwide and the other manufacturing activity in New York State—showed depressed readings. The problem isn’t demand but the ability to supply given the tight labor market. … Two recent Federal Reserve reports—measuring the household debt and credit of US consumers and the financial stability of the economy generally—showed that neither the consumer nor the banking sector nor the financial system generally is especially stressed.

Disintermediation, Disinflation & Dystopia
Executive Summary: The Fed sought to allay fears of bank runs when it provided backstop funds to banks. Consider the fears allayed—so far, at least. The disintermediation threat hasn’t descended; it hasn’t wrought a credit crunch, a recession, or widespread economic destruction. Now if fears aren’t stoked by further talk of bank runs, maybe, just maybe, the threat will go away. … Also: The high-inflation saga‘s loose ends all seem to be resolving now in a Hollywood-style happy ending. … And: The latest episode of the debt ceiling drama playing out in Washington is ably narrated by Capital Alpha’s Jim Lucier. … Lastly: Dr. Ed reviews “Beef” (+ + ).

Travel, Homes & Hydrogen
Executive Summary: Maskless and Covid-free, Americans have been venturing further abroad this year, a trend that has saddled companies with domestic-travel-related businesses with tough y/y comparisons. Airbnb and Wynn are prime examples. … Also: Jackie examines the curious divergence between the share price performances this year of two housing-related S&P 500 industries, Homebuilding and Home Improvement Retail, which usually perform in lockstep. … And: Our Disruptive Technologies focus this week is on utilities’ use of hydrogen to produce electricity.

Inflation During & After The Pandemic
Executive Summary: The inflation problem of recent years has proven to be transitory for consumer goods but persistent for consumer services. Even so, overall inflation has been moderating this year. In our soft-landing economic scenario (60% odds), we see the PCED rate falling into the 3.0%-4.0% range over the remainder of 2023 and below 3.0% in 2024 and 2025. Consumers’ inflation expectations aren’t so sanguine. In advance of this week’s inflation reports, we review recent developments on the inflation front. … Also: Wage inflation has been moderating too, but it’s still higher than Fed Chair Powell would like to see.

Jobs Driving The Economy
Executive Summary: It’s tough to believe that a recession is imminent with the Coincident Economic Indicators index as strong as ever. The CEI’s payroll employment component hit a record high in April, suggesting that the other three (yet-to-be-reported) components did too. Admittedly, the Leading Economic Indicators hasn’t been strong; its weakness purportedly indicates a coming downturn in the CEI and real GDP. But look at its ten components: Services are noticeably absent. So the LEI is not as trusty a recession bellwether as the CEI, in our view. … Also: Joe Feshbach’s insights on the stock market from a trader’s perspective.

Pandemic Of Pessimism
Executive Summary: The stock market has been climbing since mid-October even though pessimism has prevailed among economists and stock market strategists. Today, we examine this “pandemic of pessimism”—how widespread it is, our perspective on the bearish case, what the Fed’s staff thinks is ahead for the US economy, and a few of the voices of doom. … We counter that the stock market’s trend is driven mostly by the earnings trend; we doubt QT will send either southward. Earnings growth may be weak in our rolling recession forecast, but growth it will be nonetheless. The labor market’s remarkable resilience reflects the economy’s resilience.

Semis, Onshoring Boom & Hydrogen
Executive Summary: The semiconductor industry is breaking out into the light at the end of its tunnel. Its stocks are up, its CEOs are optimistic, and worldwide semiconductor sales are starting to improve. AMD’s CEO sees big opportunity in the rapid pace of AI adoption. … Also: Jackie highlights some of the many new ventures manufacturers are planning to capitalize on trillions of dollars in government incentives. Their projects may be enough to stave off a recession. … And our Disruptive Technologies segment looks at the government-incentivized green hydrogen opportunity.

Capital Spending, Automation & Earnings
Executive Summary: While surveys of business managers’ capital spending plans suggest more spending caution, that could partly reflect all the recession talk recently. Actual capital spending shows no sign of recession; it hit a record high last quarter. … Also: Factory managers are flocking to technological solutions to their many challenges, reports Jackie; Rockwell updates the story. … And: Joe reviews what Q1 results reported to date collectively say about how companies fared last quarter and how results jibe with analysts’ expectations. Notably, analysts haven’t been slashing estimates after hearing managements’ conference calls, as they’ve done in recent quarters.

Global Economy Here & There
Executive Summary: We’re not among the vocal doom-saying economic prognosticators. We say there’s a 60% chance that the economy will land softly this year and pick up speed next year, fueled by productivity gains. … Also: We update our rolling recession watch, zeroing in on two loan-dependent industries likely to be rolled over next: autos and commercial real estate construction. … And: Melissa examines why inflation is stickier in Europe than in the US and discusses other economic headwinds facing the Eurozone. These headwinds and the Europe MSCI’s current valuation make us less bullish on European stocks than we were last June.

China, Energy & CO2
Executive Summary: China’s President Xi has been pursuing an ambitious agenda for the nation, brazenly at that. Jackie reports on measures China has taken to step into the limelight on the world stage, beef up its military might, tighten its grip over multinationals operating there, and get its currency into global circulation. … Also: Energy markets are sending mixed signals, clouding the forecast. For the oil industry, tumbling earnings and revenues consensus expectations may be off the mark if optimistic oil price forecasts pan out. … And in our Disruptive Technologies segment: Expect to see more companies capturing their carbon—and attractive tax credits.

Tech, Staples & Robotaxis
Executive Summary: Before long, every large corporation will be following in PricewaterhouseCoopers’ footsteps and trying to leverage AI to their advantage. Microsoft is well positioned to benefit via its OpenAI investment and Azure cloud computing service. … Consumer Staples companies have turned investors’ heads with stellar March-quarter results, buoyed by pricing power. But their unit sales growth might be vulnerable to price-sensitive consumers’ disloyalty. … And in our Disruptive Technology segment, Jackie explores the Achilles’ heel of autonomous vehicles: situations they haven’t been programmed for.

Fiscal Dystopia
Executive Summary: If Congress doesn’t increase the federal debt ceiling soon, the government will no longer be able to pay its bills. Jim Lucier of Capital Alpha Partners reports on the progress of the Limit, Save and Grow Act, which may well pass the House this week. … The government has been in such pickles before, and the debt limit usually got raised before the 11th hour and a couple of times at the 12th hour. Of course, the recent consequences of the government’s unprecedented fiscal excesses have been massive federal deficits and inflation boosted by helicopter money. But doomsday as predicted by the doomsters has yet to arrive. We examine why. … Also: Joe looks at the profit margins that analysts expect for S&P 500 sectors and industries.

The Economy Is Beige
Executive Summary: The stock market’s resilience since October 12 in the face of Fed rate hiking reflects the economy’s resilience. Measures of breadth for industry analysts’ estimates of S&P 500 revenues and earnings have been improving since early this year, and their optimism is supported by surveys of corporate purchasing managers. … The Fed’s latest Beige Book confirms that the banking crisis hasn’t knocked the economy off its rolling-recession path. … Also: We’ve known that QT and the banking crisis exert tightening forces equivalent to some amount of federal funds rate hiking. Now the SF Fed has quantified it, finding that the “effective” federal funds rate is currently over 6%.

Yalies Yelling
Executive Summary: Banks were tightening lending standards before the banking crisis, and the crisis has escalated that. We don’t think a credit crunch will ensue, though we’re monitoring the situation closely. But we agree with Treasury Secretary Yellen that banks’ tightening of credit conditions effectively can substitute for further Fed tightening. … To monitor the crisis, we keep tabs on the Fed’s assets and liabilities, commercial banks’ assets and liabilities, and particularly the amount of loans being made by both. … Also: Dr. Ed reviews “A Spy Among Friends” (+ + +).

Health Care, Financials & Hydrogen
Executive Summary: Two of the S&P 500’s 11 sectors have staged impressive comebacks in recent weeks, Financials and Health Care. Jackie tells their laggards-to-leaders stories. … Also: Large banks’ sharp y/y increases in net interest income are making up for weaker areas of their business, enabling happy Q1 earnings surprises for some. NII gains likely peaked in Q4, but a reopening of the capital markets could help the industry as 2023 progresses. … And in our Disruptive Technologies segment: EVs have been heralded as the cars of the future, but it might be hydrogen powered cars that go the distance.

Construction, MegaCap-8 & Financials
Executive Summary: Even as the rolling recession rolls through segments of the real estate market, areas of the construction industry have never been stronger. Residential construction isn’t one of them, but nonresidential and public construction each hit new record highs in February. Construction industry employment did the same in March. … Also: If industry analysts’ forecasts are on the mark, the eight MegaCap-8 companies that exert outsized influence over the S&P 500’s performance can look forward to a rebound of their collective y/y earnings comparisons starting in Q2-2023. … And: The S&P 500 Financials sector’s growth prospects improved overnight when the Transaction & Payment Processors industry was added. Joe takes a look.

Pandemic Pandemonium
Executive Summary: The pandemic effectively accelerated the latest business cycle. Government interventions including lockdowns, rent moratoriums, stimulus payments, and ultra-easy monetary policy altered the behavior of economic actors including businesses, workers, consumers, landlords, tenants, home buyers, and home sellers. The result was a business cycle on warp speed. … Pandemic-altered consumer behavior escalated inflation, first for goods and then for services. … That disproves the theory that inflation is simply a monetary phenomenon, fully within the Fed’s power to control.

The Sky Isn’t Falling
Executive Summary: JPMorgan CEO Jamie Dimon’s ambiguous warnings about the economy broadly and banks specifically, voiced intermittently since last summer, have probably led many an investor astray. JPM stock has soared 34% since October, and the S&P 500 has leapt 7% in the month or so since SVB imploded, with every sector participating. … One thing Dimon said is on the mark: The economy isn’t headed for a credit crunch. That’s substantiated by US banks’ balance-sheet data, which we monitor. … Another alarmist creating disconcerting background noise is Fed Governor Christopher Waller. He’s not bothered by the economy or the banking crisis but by inflation, which he says requires further tightening. We strongly disagree.

Materials, Earnings & Bricks
Executive Summary: Banking-crisis-stoked recession fears knocked the S&P 500 Materials sector off its top-performing perch; now with those fears allayed, it’s been rebounding. Jackie examines the earnings prospects of two Materials industries, steel and copper, and the economic prospects of their biggest consumer, China. … Also: While analysts have lowered their earnings sights for S&P 500 companies collectively in recent weeks, forward earnings have risen for more S&P 500 industries than have fallen. The outlooks for travel and commodities related industries have improved the most. … And: A promising new energy storage solution comes from improbably low-tech sources that have been right under our feet: bricks and stones.

Bulls vs Bears
Executive Summary: We’re still stock market bulls, believing that the bear market ended in October. But now that the Fed’s tightening has touched off a financial crisis, we’d defect to the bear camp IF the Fed were to keep on tightening. … While industry analysts have been lowering their earnings sights this year, that’s almost moot to stock investors, who are more focused now on next year’s better growth prospects. … Also: The current concerns of small business owners are anything but small, including inflation, labor shortages, and a possible credit crunch. … And: The MegaCap-8’s upcoming Q1 earnings reports could set the tone for the S&P 500’s performance.

The Big Lebowski
Executive Summary: The Fed’s rate hiking may have busted something in the credit system. Specifically, the disintermediation that tightening has caused may require small banks to cut costs so deeply that merging is their only recourse. … Given this, how can the Fed fail to conclude that the federal funds rate is restrictive enough now? Pausing the tightening for a while should land the economy softly, with moderating inflation. But continued tightening would cause a hard landing and possibly even deflation. … And: You wouldn’t know there’s any landing debate going on looking just at the labor market; payroll employment is at a record high.

It Still Looks & Walks Like A Duck
Executive Summary: The tug-of-war between the hard-landers and the soft-landers continues. The twists and turns of recent economic-outlook-impacting events have been taking investors for a ride, but our stance remains steadfastly fixed on one outcome: a soft landing of the broad economy with mini recessions continuing to roll through various sectors. … Friday’s labor market report supports our soft-landing thesis. … While hard-landers think the banking crisis will trigger a credit crunch, causing a recession, we doubt it—believing that scenario will be avoided by the actions taken by the Fed and FDIC. … And: Dr. Ed reviews “Tetris” (+ + +).

Oil Markets & AI In HR
Executive Summary: Oil futures leapt this week after OPEC+ announced it would cut oil production. Jackie examines possible reasons for the organization’s decision and likely ramifications for Saudi Arabia, the US, and US oil producers. … Also: Judging by the 8% surge in the S&P 500 Oil & Gas Exploration & Production price index over the past week, investors expect the production cuts will mean much better 2023 earnings prospects than the declines that analysts had been expecting. … And: What can’t bots do? Our Disruptive Technologies segment focuses on the use of AI to interview job candidates.

All About Earnings
Executive Summary: Today, we analyze the analysts, specifically industry analysts’ recent earnings and revenue estimate revision behavior. Their collective earnings estimate shaving doesn’t suggest recession jitters, in our view, even though flattish y/y revenues expectations may indicate concern about unit sales. Forward earnings remains consistent with a soft landing. … And: Analysts typically do lower their quarterly estimates as a quarter progresses, often setting the stage for a positive earnings surprise. Joe highlights the takeaways from data on earnings estimate revisions that occur in the runup to reporting seasons, including what the data say about Q1-2023.

Executive Summary: All 11 sectors of the S&P 500 are up since October 12, which we believe was the bear market’s bottom and the start of a new bull market in stocks. Leading the charge has been the MegaCap-8 stocks, which collectively now make up nearly a quarter of the S&P 500’s capitalization and nearly half of the S&P 500 Growth index’s. … With all the focus on a prospective credit crunch, gone relatively unnoticed are two market-buoying positives: Corporate cash flow hit a record high at year-end 2022, and the global economy has been proving rather resilient.

Banking Crises, Then & Now
Executive Summary: The S&L crisis of 1990 caused a mild, short-lived recession impacting earnings but not triggering a bear market in stocks. Conversely, we had a bear market last year but no recession (yet?). Similarly, though, the commercial real estate market was hit hard during 1990’s banking crisis and stands now in the eye of the SVB storm, since small banks—the most vulnerable—make most CRE loans. … Also: Do you wonder why consumer spending has been so resilient lately? That huge demographic cohort that disrupts the status quo at every life stage is at it again. … And: For stock traders, Joe Feshbach’s take on the market. … Finally: Dr. Ed reviews “Godfather of Harlem” (+ + +).

Financials, Semis & The Fountain Of Youth
Executive Summary: Financial companies have had it rough lately, but those involved in the capital markets should benefit from easy y/y comparisons this year. Jackie recaps takeaways from Jeffries’ fiscal Q1 earnings, as the early reporter may be a bellwether for the industry, as well as industrywide data and analysts’ expectations for the S&P 500 Investment Banking & Brokerage industry. … Also: The semiconductor industry downturn may finally be ending, says Micron Technology’s CEO. But semiconductor investors are already focused on 2024’s better growth prospects. … And in our disruptive technologies spotlight: a breakthrough in anti-aging science.

Churning Earnings
Executive Summary: The SVB debacle has depressed the S&P 500 Financials sector’s market-cap share further below its earnings share. And the S&P 500 Bank Composite hasn’t ever been this cheap relative to the S&P 500 (i.e., since the mid-1980s start of the data). We liked the Financials sector before SVB imploded and like it even more since, as the fallout we expect doesn’t include systemic contagion and does include more M&A activity. … Also: While analysts have been cutting their 2023 earnings estimates for S&P 500 companies, the index’s forward earnings increasingly reflects the higher 2024 estimates and has stopped falling. … Also: Joe discusses some impacts of Standard & Poor’s sector and industry reclassifications.

‘Yes, There Will Be Growth in the Spring!’
Executive Summary: Stock market bears have long expected a recession, but now the prospective credit crunch that could cause one seems more plausible after the SVB crisis. … We expect that the Fed and FDIC will contain the crisis. But we do see regional banks paying higher deposit rates now to prevent disintermediation. That’s likely to hurt their profitability and prompt more cost-saving M&A activity among them. … Also: The latest batch of economic indicators supports a soft-landing scenario.

‘Is It Safe?’
Executive Summary: The recent banking crisis has heightened fears of a recession. But still the S&P 500 is up ytd—buoyed greatly by the MegaCap-8 stocks. … The SVB debacle hasn’t changed our economic outlook, which pegs the odds of a recession at a relatively high 40%, as we’re not convinced it will lead to a credit crunch that triggers a recession. … We’ll know if the banking system isn’t as resilient as we think if we see deterioration in the Fed’s weekly H.8 data, showing the assets and liabilities of commercial banks. … So far, we think that the SVB crisis will be contained thanks to the Fed’s emergency liquidity facility. … Dr. Ed reviews “Boston Strangler” (+).

Communication Services & AI
Executive Summary: The S&P 500’s Communication Services sector has outperformed all ten of its counterparts so far this year, up 18% ytd. Jackie examines the constituent industries and companies that have been driving the sector’s strong showing, with a particular focus on Meta, up 68% ytd. … Also: Companies in diverse industries are harnessing the power of AI in manifold ways to help people work faster, smarter, and even more deceptively (beware of AI fakes!). This week’s disruptive technologies segment highlights some of the players in the AI space and the innovative products they’re turning out.

Looking Ahead To Earnings Season
Executive Summary: Industry analysts and company managements have an optimism bias that blinds them to encroaching recessions. So when a recession looms, forward earnings’ reliability as an indicator of actual earnings to come falters. … While analysts have been cutting their 2023 and 2024 earnings estimates for S&P 500 companies since last summer, their expectations for next year are still higher than for this year. As long as that remains the case, forward earnings, which have been declining since last summer, soon should stop falling and start moving higher unless a recession happens. … And: S&P 500 earnings growth ex Energy sector could turn positive in Q2 as Energy de-energizes.

Giving Credit Where Credit Is Due
Executive Summary: The spread between the 10-year Treasury bond yield and the federal funds rate inverted in November; such inversions are predictive of credit crunches and recessions. They also tend to predict financial crises that halt Fed tightening. It’s too early to credit the yield-curve inversion for calling a recession, but it was spot on in presaging a crisis like SVB. … Small banks seem vulnerable now to depositor flight, which could prompt a credit crunch impacting small businesses. … But we don’t think a credit crunch would hurt consumer spending and homebuying as much as lower interest rates will boost them. … Our message to the FOMC: Give it a rest.

Other People’s Money
Executive Summary: Will SVB be the financial domino that sets off an economy-wide credit crunch that leads to a recession? Maybe not given the Fed’s intervention; but if so, we don’t see another Great Financial Crisis. … Why have banking crises been a recurring cause of US recessions anyway? The crux of the problem is that bankers tend to take excessive risks because it’s not their own money on the line and the government has their backs. … Also, we take close looks at: how Fed tightening has eroded the value of banks’ bond portfolios, the SVB blame game, and SVB’s economic ripple effects. … And: Dr. Ed reviews “Living” (+).

Banks, Tech & Batteries
Executive Summary: SVB wasn’t last week’s only bank run: Two crypto-friendly banks that served as the major gateways to the crypto world also succumbed to depositors deciding to take their money and run. Jackie performs brief autopsies and looks at their impact on the crypto markets and the banks positioned to take their place. … Also: Counterintuitively at this time of economic uncertainty, the Technology sector has been outperforming the broader index since its February 2 peak. … And our Disruptive Technologies focus today is on the quest to build a better EV battery.

The Oscars
Executive Summary: Within days of the run on SVB, the Fed has donned its “lender of last resort” cape—guaranteeing all bank deposits by all depositors (!), creating a new emergency bank lending facility, and launching a review of what went wrong at SVB. As a result, we don’t see sufficient SVB ripple effects to alter our outlooks for the economy or financial markets. … Also: Inflation has proven both more transitory (consumer goods inflation) and more persistent (consumer services) than expected, but both types have moderated lately. … And: Joe examines the S&P 500 Growth index’s comeback relative to Value after more than a year as the underdog.

The Lender Of Last Resort
Executive Summary: While the Fed and FDIC have acted swiftly to contain the SVB debacle, could it still balloon into a financial crisis like previous ones that triggered a credit crunch and recession? It could if it set off a wave of disintermediation at banks broadly, but we doubt that will happen; we think the regulators’ actions will work. … So the incident doesn’t change our outlooks for the economy, stock market, or bond market. But it does revive the “Fed Put.” That’s because the Fed’s actions to stabilize the banking system also stabilize financial markets.

Run For The (Sand) Hill
Executive Summary: Tightening monetary cycles often end abruptly when “something breaks” and a financial crisis is triggered. If the Silicon Valley Bank run is that something, it could mean tightening ends sooner and bond yields have peaked. We can’t say for sure that’s the case but can say the debacle should keep the tech sector mired in its rolling recession for longer. While the SVB crisis doesn’t change our economic and stock market outlooks for now, it adds uncertainty until resolved in a way that minimizes systemic shock. … Also: A theory for why labor market demand so persistently exceeds supply points a finger at the Baby Boomers. … Dr. Ed reviews “Till” (+ + +).

China, Defense & AI Videos
Executive Summary: China’s economy has recovered after the country lifted its zero-Covid lockdowns. But that news has been eclipsed by the rising geopolitical tensions between the US and China. Jackie examines the escalating tensions. … Also: A look at projected defense spending in the US and China and how the S&P 500 Aerospace and Defense industry’s stock price index has been faring after a super-strong 2022. … Finally, our Disruptive Technologies segment focuses on how AI is transforming the production of movies and video games.

Profit Margin Recession?
Executive Summary: Today, we examine S&P 500 companies’ revenues, earnings, and profit margins as reported for Q4-2022 and as estimated by industry analysts for 2023. Notably, Q4 revenues grew impressively to a record high, but inflation accounted for much of that. Operating earnings per share fell y/y, and just two S&P 500 sectors saw y/y earnings growth. Profit margins were squeezed by rising labor costs at a time of negative productivity growth. … While Q4 is behind us, its influence isn’t: It has caused analysts to chop earnings expectations for all four quarters of this year. Current 2024 estimates may prove too low if they reflect a recession that never arrives.

Selected Sectors Short Studies
Executive Summary: Our base-case economic outlook is upbeat. Stock investors likewise seem optimistic about the economy given which S&P 500 sectors have led the index’s advance since October. We recommend overweighting five S&P 500 sectors this year: Energy, Financials, Industrials, Information Technology, and Materials. … Also: We zero in on the themes and data supporting two of these recommendations, Information Technology, which stands to benefit from companies spending on productivity-enhancing technologies in this tight labor market, and Industrials, which should benefit from strong spending on infrastructure construction, manufacturing capacity, and industrial machinery in a growing economy.

The ‘Roaring 2020s’ Revisited
Executive Summary: Productivity was poor last year—declining more than it has since 1974—and growth in unit labor costs was high. But the final quarter of 2022 saw significant improvements in both, and we think the worst is over for both. If productivity continues to improve as companies increasingly solve their labor challenges with technological innovations, that should lead to lower inflation, higher real wages, and better profit margins. That’s the thesis of our “Roaring 2020s” outlook. … Also: The economy has been experiencing a rolling recession that started last year. Today, we examine rolling recessions, past and present. … And: Dr. Ed reviews “The Whale” (+ + +).

Consumer Discretionary, Utilities & AI Fake Voice
Executive Summary: Retailers are wary about the effects of high inflation and rising interest rates on consumers’ discretionary spending. But Target this year stands to benefit from easier y/y comparisons and shoppers looking for alternatives to its rapidly shrinking competitor Bed, Bath & Beyond. Jackie examines. … Also: Will demand for electricity outstrip available supply over coming years with retiring fossil-fuel-powered electricity generation replaced by less reliable green alternatives? That’s what one transmission organization projects. . … And: With voice-cloning software readily available, its potential nefarious (as well as silly) uses may spark new opportunities in identity authentication.

On Valuation & Central Banks
Executive Summary: Today, we look at valuations for various investment style indexes. Notably, the S&P 400 MidCaps and S&P 600 SmallCaps—a.k.a. SMidCaps—haven’t been this cheap versus the S&P 500 LargeCaps since 2000. Growth and Value indexes underwent major shifts when the MegaCap-8 stocks were redistributed among them in December. Global markets have been outperforming the US MSCI. They’re collectively still cheap relative to the US. But we wouldn’t stray too far from home for long … And: The underlying structural issues keeping inflation aloft will be solved by market forces, not with monetary policy. … Also: The ECB has been tightening, but perhaps not enough yet.

The Inflation & Valuation Questions
Executive Summary: Are stock valuations too high for our inflationary times? Admittedly, last year’s bear market didn’t maul valuations as severely as most do. But inflation has been moderating in a host of areas, which we expect to continue. And if the economy sticks to the rolling-recession script, as we think it will, stocks aren’t overvalued but fairly valued, in our opinion. … Also: For more perspective on the valuation question, we look at various valuation models’ current readings in their historical context, including a valuation model that takes inflation into account.

March Madness?
Executive Summary: The stock market beat a hasty retreat in February, spooked by reports of January’s economic strength and the Fed’s dreaded possible reaction. So today we look at what March’s releases of economic data for February might bring. They could be bad news for the markets, but we actually expect the best—viewing January’s strength as anomalous and expecting February’s data to confirm our soft-landing outlook. Accordingly, we still think a new bull market was born last October; it’s just not bursting out of the gate as most bulls do. The market may remain volatile pending more clarity on what the Fed will do. … Also: Dr. Ed’s bearish review of “Cocaine Bear” (-).

On Earnings & Fuel Efficiency
Executive Summary: For the S&P 500 index and many of its sectors, forward revenues are at record highs but forward earnings are below their record highs of last year. The disparity indicates a profit-margin squeeze, with several labor-cost-related sources; those stemming from pandemic aftereffects should abate in time. … And: The fuel efficiency of automobiles has been climbing—with more miles traveled on fewer tanks of gasoline. Increasing use of electric vehicles may be driving this trend. Jackie collects the evidence from two places where EV adoption is ahead of the curve, California and Norway. It’s a nascent trend worth watching given the ramifications for global oil demand.

On US Earnings & India’s Economy
Executive Summary: This earnings season stands out from most, and not in a good way: Hearing managements discuss their companies’ Q4 results on conference calls has sent analysts back to their spreadsheets. Consensus earnings estimates for all four quarters of this year have been falling. … Looking at valuations in the context of falling estimates suggests that the S&P 500 isn’t cheap after its runup since October. SMidCaps and overseas stocks are cheaper. … Also: India aims to usurp China as the go-to nation for outsourcing, hoping to shed its “developing” status and become a global trade leader. But first, it may need to clean up its act.

Four Landing Scenarios
Executive Summary: What’s next for the US economy? Of four potential outlooks, we see the greatest odds (40%) of a soft landing in which inflation moderates, the Treasury bond remains below last year’s peak, and the S&P 500 ends the year at a new high. We also see two no-landing possibilities—one disinflationary, one inflationary (20% each)—and a possible hard landing (20%). The first two scenarios would be optimistic for the economy and bullish for stocks, the last two negative and bearish. … Also: We examine data supporting the relatively new no-landing scenarios as well as the latest inflation data. … And: Dr. Ed reviews “Vikings: Valhalla: Season 2” (+ + +).

Industrials, Chinese Spies & MIT’s Picks
Executive Summary: Three pieces of recent legislation incentivize manufacturers to produce their goods on US soil, and the amount being spent on the construction of new factories has risen sharply, presumably in response. Jackie examines the projects planned by three such companies—a solar panel maker, a semiconductor manufacturer, and Ford Motor. … Also: We recap the DOJ’s recent efforts to stop Chinese spies intent on stealing US technology and defense secrets. … And: A look at several innovations on MIT’s short list of life-changing new technologies.

On Consumer Inflation & Housing Activity
Executive Summary: Yesterday’s CPI report for January showed inflation continuing to moderate but slowly. The new information isn’t likely to moderate Fed officials’ hawkishness, though, and doesn’t much change the economic outlook. We continue to see a soft landing with disinflation as the Fed continues to raise the federal funds rate to 5.10%, then keeps it there through year-end. So the stock-market implications of the CPI results are minimal. But stocks and bonds might be ready for some consolidation after their runups since October. … Also: Melissa homes in on why home prices have been holding up and looks at housing market trends.

Guides to Inflation & the Economy
Executive Summary: How investors interpret this morning’s CPI release for January could move the markets; but assessing what the data say about inflation’s stickiness may be tricky given BLS’s new CPI calculation methodology. All eyes will be on services inflation in particular since it hasn’t yet peaked, buoyed by wage inflation. … The long-running hard-vs-soft-landing economic debate now includes a no-landing prospect, which itself has two scenarios—an inflationary version (possibly the long route to a hard landing?) and a disinflationary one. The latter would be ideal, and we think it’s possible. … Also: The economies of Europe and China both dodged bullets this winter, to widespread surprise.

Financial Conditions
Executive Summary: Perversely, the financial markets’ vote of confidence in the Fed’s ability to subdue inflation without getting the economy into trouble represents a threat to those very efforts, in Fed officials’ eyes, loosening financial conditions as the Fed tightens them. So Fed officials have been trying to squelch investor optimism. … A close look at the data relevant to financial conditions reveals them as tight, but in a good way—tight enough to bring inflation down without a recession but not tight enough to provoke a credit crunch that results in a recession. We continue to stand behind our disinflationary soft-landing forecast. … Also: Dr. Ed reviews the film “Mr. Jones” (+ + +).

Financials, Cruise Lines & AI Search
Executive Summary: The stock market’s strength since October has been a beckoning beacon for the capital markets: IPOs have revived, bond markets have calmed, and bond issuance has picked up. It may be halcyon days for the capital markets if investors in the shares of alternative fund managers are correct. These bellwethers of capital markets activity have outperformed the S&P 500 dramatically since September. … Also: Consumers are spending on travel again—sparking earnings recoveries for Royal Caribbean and the S&P 500 Hotels, Resorts & Cruise Lines industry generally. … And: AI is poised to transform search, but market dominance may be up for grabs.

The Third & Fourth Scenarios
Executive Summary: Strong economic releases last week raise new uncertainties for financial markets. No longer is the economic debate limited to the hard-or-soft-landing question. Two no-landing scenarios are in the running now—one bearish for stocks (if inflation can’t be controlled) and one bullish (if inflation moderates). We still forecast a soft landing with moderating inflation, which would be bullish. Minneapolis Fed President Neel Kashkari seems to be concerned about the inflationary-no-landing scenario. … Also: Fixed-income markets have sent interest rates higher in response to the robust economic data. … And: A look at the European Central Bank’s tightening course ahead.

Earnings & Valuation
Executive Summary: While earnings recessions usually don’t occur without economic recessions, recent data suggest a possible decoupling. Analysts have been lowering their earnings estimates, and a recession in forward earnings could occur if forward margins decline faster than forward revenues grow. Yet we see no recession ahead in the broad economy—or in earnings—but a soft landing, with real GDP growth approximating 1.0% during the first half of this year and 2.0% during the second half. … Also: Valuations have been rebounding across the board for S&P indexes since October 12, surprisingly so for the S&P 500 and its Value index. Comparatively low valuations in overseas stock markets have begun luring global investors.

US Economy: Still Flying & Disinflating
Executive Summary: Last week brought plenty of affirmation for stock-market bulls, with lots of favorable data releases and a less hawkish-sounding Fed Chair Powell. The data depicted an economy that has not been landing at all but remaining quite airborne amid more signs of disinflation. … Powell said in his post-FOMC meeting presser that disinflation has a ways to go. Until inflation declines to the Fed’s target level, monetary policy will remain restrictive, he said, confirming that two more 25bps hikes in the federal funds rate are likely, followed by a pause. We review the latest disinflation readings, and Dr. Ed reviews another movie: “To Leslie” (+ +).

All About Tech & Productivity
Executive Summary: Robotics and artificial intelligence are transforming myriad companies in multiple industries—allowing producers and service providers alike to work more efficiently, become more agile, and make up for productivity lost through repeated hiring and training in this tight job market. Rising adoption of robotics and AI solutions over time should drive gains in corporate productivity and mitigate businesses’ labor challenges. After all, robots never sleep! Jackie reports on some of the innovative ways that companies in various industries are putting tireless robots to work.

Peak Hawkishness?
Executive Summary: It’s almost a given that the FOMC will decide today to ratchet up the federal funds rate by another 25bps. Less certain are how hawkish FOMC members will sound discussing the future course of monetary policy—starting with Fed Chair Powell today—and how much their words may perturb financial markets. But since the Fed remains ever “data dependent,” we can gain insight into their thinking by examining the recent data releases that are likely to affect it. … Also: Improving global growth prospects are igniting commodities markets, especially for gold, copper, and other metals. Melissa takes a look.

Market Dynamics
Executive Summary: Old-fashioned stock picking may be coming back into fashion as momentum investing stumbles. The breadth of stocks participating in the recent rally is improving, which could even the playing field for active versus passive equity managers and give the former a shot at outperforming the latter. … We recommend overweighting four S&P 500 sectors this year (Energy, Financials, Industrials, and Materials), market-weighting two (Tech and Health Care), and underweighting the remaining five. Our choices reflect our soft-landing expectations for the US and global economies in 2023 (with better growth in 2024)… Also: The latest Fed business surveys depict a slowing US economy and lower inflation.

Executive Summary: The global financial markets are reflecting expectations for an improved global economy, and the US stock market is siding with the optimists on the US economic outlook, us among them: We continue to see greater odds of a soft landing (60%) than a hard one (40%). … Recent GDP and inflation data support our soft-landing scenario. Q4 GDP was strong, but a look under the hood suggests it was boosted by unintended inventories and Q1 GDP might be tempered by inventory liquidation. The past three months of PCED inflation data highlights reassuring downward progress, especially in goods inflation. … And: Dr. Ed reviews “Argentina 1985” (+ + +).

Transportation, Semiconductors & Digital Wallets
Executive Summary: Shifts in consumer purchasing have left retailers overstocked and shippers of goods feeling the pinch. But the sense among transport company managements is that demand for their services will normalize this year. Transportation stocks have been rallying in anticipation. … Another industry impacted by shifts in consumer spending is semiconductors, as computer sales have slid dramatically. And like the transports, semiconductor stocks have been outperforming the broader market as investors look past the pain. … Speaking of pain, the big banks have finally bitten the bullet and decided to develop a digital wallet of their own.

What’s in StyleAt S&P and the Fed?
Executive Summary: Standard & Poor’s last month reshuffled the components of its S&P Growth and Value indexes, with dramatic impacts on their valuation metrics. Ejected from the Pure Growth index were most of the MegaCap-8 companies, along with their gargantuan capitalizations; now only Apple remains. The forward P/Es of the S&P 500 Growth and Pure Growth indexes plummeted as a result. … Also: While FOMC members can’t share what’s been on their minds during the current pre-meeting quiet period, Melissa recaps what they last said about their expectations for monetary policy.

Market Timing
Executive Summary: Both the stock market’s and the bond market’s October bottoms have held so far—following the script we outlined as a possibility back that month. It involved moderating inflation, which we’ve seen, an end to Fed tightening, which we should see soon, and better GDP growth than we had expected, i.e., no landing so far. On the other hand, yesterday’s LEI report suggests a hard landing, while the CEI suggests a soft landing. … Also: We share insights from market maven Joe Feshbach, who notes some auspicious signs in measures of breadth. … And: We look at some total-return statistics to emphasize the importance of dividends to returns.

Another Recession Alarm Ahead
Executive Summary: Brace yourself for December’s Leading Economic Indicators and Coincident Economic Indicators coming out today. They are likely to trigger another recession alarm. But we still see greater odds of a soft landing (60%) than a hard one (40%). … What can the LEI and CEI tell us about the economy and what can’t they? Today, we discuss their usefulness and limitations. … Also: They aren’t the only economic indicators worth watching. … And: Dr. Ed reviews “The Menu” (+ + +).

Health Care, Going Global & ChatGPT
Executive Summary: The S&P 500 Health Care sector sheltered investors from the ravages of last year’s bear market, but it’s been underperforming since the market began to recover in mid-October. Jackie examines why other sectors might be more alluring now and why investors are looking past meager 2023 growth prospects for select health care companies active in M&A. … Also: Why have global stocks begun outperforming US stocks? Fears not materializing in Europe and China are part of the picture, US economic uncertainty and middling earnings growth prospects are another. … And: In a world where AI programs can write like humans, what could go wrong? Plenty.

Some Happy Developments
Executive Summary: When the equal-weighted S&P 500 price index outperforms the market-cap-weighted one, that signals rising stock market breadth. That’s what’s been happening since October 12, the date that the bear market probably ended. … Also: Wall Street has turned more bullish on prospects for Europe’s economy and stock markets in the wake of two big happy developments there. We’re in the bullish camp. … European economic indicators suggest a budding recovery—with improving energy markets tempering inflation and bolstering industrial production as well as both consumer and business sentiment.

Inflation: Persistent, Transitory, or Both?
Executive Summary: Consensus economic views seem to be mostly pessimistic. Big bank CEOs are preparing for a mild recession. Americans are skittish about a downturn, most economists project a recession, and lots of investment strategists remain bearish. But not us: We don’t foresee recessions this year in the US, Europe, or China. And we think 2023 will be an up year for the stock market. … Also: Goods inflation is proving transitory. Services is less so, hiked by unusually high rent inflation. And: a closer look at the Fed’s core services ex housing costs CPI. … Dr. Ed’s review of “The Banshees of Inisherin” (+).

Financials, Materials & Robots
Executive Summary: Yes, most banks and brokerages’ Q4 results will be down y/y, but investors already knew that. As long as earnings reports don’t bring much new negative news, the S&P 500 Financials sector’s rebound may continue, buoyed by easy y/y comparisons ahead. … Also: The World Bank‘s global growth forecast for this year is now a grim 1.7%. But you’d never know it from the surge in metals prices and the S&P 500 Materials sector since October. The strong dollar, China’s lockdown unlocking, and Europe’s energy resourcefulness no doubt have helped. … Also: How robots are about to transform farming, EV fueling, and manufacturing productivity.

Earnings Bottoming?
Executive Summary: Might the worst be over for corporate earnings? The earnings recession in some industries likely continued during Q4, with economically sensitive ones the worst hit. But Q4 may mark the bottom for earnings growth, as we don’t see a broad-based recession this year. … In yesterday’s Morning Briefing, we likened Fed Chair Powell’s bond-market conundrum to his predecessor Greenspan’s. But does Powell have a lever to hike bond yields that Greenspan didn’t? Perhaps, but pulling it is no option. … Consumers aren’t tapped out yet: Their revolving debt as a percent of income is only around pre-pandemic levels. … And: The labor market remains unbalanced.

Powell’s Conundrum
Executive Summary: US bond markets haven’t responded as expected to the Fed’s warnings not to expect the federal funds rate to be lowered this year. Bond investors seem unfazed by this, which is fazing Fed Chair Jerome Powell. He’s been fretting that easy financial conditions aren’t what the Fed needs to see at this time of tightening by the Fed. It’s all reminiscent of “Greenspan’s conundrum” during the early 2000s. The bond market then too seemed unaffected by the Fed’s tightening. This time, Fed officials have turned more hawkish because investors aren’t listening to their warnings. Perhaps, Fed officials should listen to the bond market.

Good Start
Executive Summary: We still see greater odds that the economy will glide to a soft landing (60%) than plummet to a hard one (40%), which nearly everyone else expects. What might a soft landing look like? The happiest—and most contrary—of scenarios would be a return of the “Old Normal,” which actually wouldn’t entail a landing at all: real GDP growth of at least 2.0%, moderating inflation, and not much more monetary tightening. … We expect this week’s market-moving news to be mostly reassuring, with a subdued CPI release and earnings reports that don’t disappoint. … Recent news has cut both ways—a concerning NM-PMI but auspicious capital-spending signs. … Movie review: “Tár” (+).

All About Central Banks
Executive Summary: Bears warning that the worst is yet to come for financial assets and the economy emphasize the effects on asset prices of central banks’ recent tightening policy moves, in the US and around the world. Yes, the unconventionally easy monetary policy that greased financial markets for more than a decade is over, but quite a bit of the tightening that has replaced it has been discounted by financial markets already. Moreover, most asset bubbles have burst already without much collateral damage. And the US markets continue to benefit from record foreign capital inflows. … Also: Melissa recaps recent monetary policy developments in Europe, Japan, and China.

Recession in 2023: 60/40 or 40/60?
Executive Summary: With last year thankfully behind us, we take stock of what could go both wrong and right for the economy in 2023. We’re optimistic that 2023 will be better than 2022 for several reasons, but that’s a contrarian viewpoint. We maintain our 60% subjective odds that the economy will achieve a soft landing in 2023 and 40% odds that it will land hard, with a broad-based recession and no bull market resuming for stocks. Much depends on what happens with Fed policy and inflation. … Dr. Ed reviews “Causeway” (+).