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ECONOMIC WEEK AHEAD: September 7-11
August payroll employment jumped 162,000, a sharp reversal from July's decline, while the August unemployment rate held steady at 4.1%. Those numbers reinforce our view that the labor market remains solid, so the Fed has little reason to delay a rate hike. The federal funds futures market now prices a 59% chance of a hike at the September 15-16 FOMC meeting, up from roughly 50/50 before the employment report, with room to move either way once fresh data lands. This week, attention turns to inflation, with August's PPI (Thu) and CPI (Fri) coming out. Overseas, China's CPI and PPI (Wed) and the European Central Bank's (ECB) meeting (Thu) top the international agenda. We will also see earnings reports from Oracle and Adobe (Thu). Here's more: (1) Inflation. The Cleveland Fed Inflation Nowcasting model projects August CPI (Fri) rose 0.36% m/m and 3.38% y/y, unchanged from July's 3.4% (chart). The model's core CPI projection eases to 0.20% m/m and 2.38% y/y, down from 2.5% in July. A mild print this week could pull the odds of a September Fed rate hike back down. An upside surprise would practically guarantee a majority vote to hike at the FOMC's September 15-16 meeting. Rising high-tech component costs continue working through the pipeline. PPI Electronic Components & Accessories is up 28.0% y/y, outpacing CPI Computer Software & Accessories, up 21.2% (chart). The gap suggests plenty of upstream pressure still has room to work through to the consumer level. Record diesel fuel prices are also putting upward pressure on inflation. Headline PPI Final Demand cooled to 4.7% y/y in July from 5.5% in June (chart). The underlying trend remains sticky, though. The measure excluding trade services was 5.2%, and the core PPI came in at 4.7%. (2) Unemployment Claims. Initial claims was 206,000 for the week ending August 28, with the four-week average at 207,300 (chart). That's consistent with Friday's employment report, which showed the unemployment rate holding at 4.1% in August alongside broad-based job growth, with no signs of rising layoffs. (3) Global. The ECB meets Thursday, with markets treating a hike to 2.50% from 2.25% as a virtual certainty (chart). More interesting will be what ECB President Christine Lagarde signals for October’s meeting; the odds of a follow-up hike then sit at just 31.5%. China's PPI climbed to 3.5% y/y in July, its firmest reading in years, driven by mining and raw materials prices (up 16.4% and 6.1% y/y, respectively) amid global commodity price pressures (chart). The CPI has barely moved, at 0.5%, so the reflation so far looks like a factory-gate story rather than a consumer one. August's data (Wed) are expected to show a small pickup in both measures.
US SECTORS CALL: Financials, Real Estate & Utilities
Energy (OW) led the S&P 500 sectors again last week, up 2.3% as the price of Brent crude rose back above $95 a barrel. The sector is now up 41.6% ytd, the best of all sectors (chart). Information Technology (MW) rose 1.1% wtd, with Dell stealing the headlines. The performances of the rate-sensitive sectors were mixed: Utilities (OW) rose 0.7%, while Real Estate (UW) fell 1.3%. Financials (OW) was unchanged. Here's more on Real Estate, Utilities, and Financials: (1) Real Estate. Real Estate trades at a forward P/E of 35.3, up from 35.0 at the end of 2025. The S&P 500’s forward P/E fell from 22.2 to 19.6 over the same period, and Information Technology’s fell from 26.5 to 21.0 (chart). Real Estate is one of only three sectors that investors have revalued higher this year, and it’s the most expensive sector in the index by a wide margin. Analysts expect the sector's earnings to grow 15.8% this year and 6.6% next (chart). The Data Center REITs industry leads the sector with a 30.0% ytd gain (chart). However, industry analysts expect long-term earnings growth (LTEG) of 1.6%, with short-term expected growth (STEG) of just 4.8%. Yet it trades at 60.7 times forward earnings. Local opposition blocked or delayed at least 75 US data center projects worth roughly $130 billion in Q1, according to Data Center Watch. Charlotte has since passed a 150-day moratorium on new construction, the largest US city to do so, with more state bills pending ahead of the midterms. Prices have started to reflect it. The RACK data center supply chain ETF has fallen 10% from its June peak. Estimates for the REITs have not been marked down at all; and at 60.7 times earnings, nothing is priced for construction delays. We are retaining our underweight rating on Real Estate. (2) Utilities. The Utilities sector has gone nowhere this year, and its profitability has never been better. The sector is up 0.3% ytd, ahead of only Consumer Discretionary, while its forward profit margin has risen to 15.1% from 8.2% in 2012. It trades at 16.7 times forward earnings against 19.5 for the index (chart). The sector's growth is concentrated. Analysts expect Utilities earnings to grow 11.3% this year, but Independent Power Producers’ growth is forecast at 90.2% against 13.4% for Gas Utilities, 8.5% for Electric, 7.9% for Multi-Utilities, and 6.8% for Water (chart). The rest of the sector is expected to grow at rates in the single digits. We are retaining our overweight rating on Utilities. (3) Financials. Forward earnings for the Financials sector has risen 11.7% ytd while the forward P/E has fallen 6.0%, leaving the price up 5.8% (chart). Earnings has risen every month this year. The multiple has not recovered its January level. That leaves the sector trading at 15.3 times forward earnings against 19.5 for the index, a discount it has held since 2010 (chart). It produces 15.7% of the S&P 500's forward earnings on just 12.4% of the index's market capitalization. Analysts expect Regional Bank earnings to grow 15.9% this year and 12.9% next, while they see Diversified Banks earnings growth shrinking from 22.5% this year to 7.6% next year (chart). Regional Banks trade at 10.4 times forward earnings against 12.8 for Diversified. The cheaper industry has more durable growth. The sector's performance spread is wide. Investment Banking & Brokerage leads at 17.1% ytd, and Life & Health Insurance is close behind at 15.4%, while Regional Banks is up 9.5% (chart). We are retaining our overweight rating on Financials.
US MARKET CALL: More Fabulous Earnings Momentum
The Fed might or might not raise the federal funds rate this month. The war in the Middle East may or may not be over (and isn't even a war anymore, says VP JD Vance). A debt crisis may be imminent, or not. The Republicans will probably lose the House in the midterms, or maybe not. Putin may or may not invade NATO. Trump might embargo US trade with countries with a trade surplus with the US, or whatever. Meanwhile, there's no doubt that corporate earnings are soaring. Fabulous Earnings Momentum (FEMO) is driving the market higher despite all the uncertainties listed above. I. Earnings During Q2, S&P 500 earnings per share rose a whopping 50.7%, up from 19.0% during Q1 (chart). Analysts now project 23.6% for Q3 and 27.9% for Q4. Q2 includes the mark-to-market (MTM) gains we have flagged for several weeks. Without them, the Q2 gain was about 25%. The back-half earnings estimates exclude MTM gains, and the Q3 and Q4 estimates are still rising. Forward earnings rose to a record $401.75 per share last week (chart). It is converging toward the year-end consensus estimate for 2027, which just jumped to $418.76, exceeding the $415.00 we set as our year-end target for both series. We are sticking with our 8,400 S&P 500 year-end target for now. We might have to raise our S&P 500 target, which is the highest on the Street, if the 2027 estimate continues to rise (chart)! S&P 500 forward revenues per share is at a record high (chart). This suggests that the global economy is performing well since roughly 40% of S&P 500 revenues come from abroad. Rising revenues and even faster-rising earnings mean widening profit margins. The forward profit margin is 16.6%, and the 2027 consensus margin is 16.8% (chart). Both continue to hit record highs. The strength in earnings is broad-based. Some 88.3% of S&P 500 companies currently have positive 12-month changes in forward revenues, and 85.9% have positive changes in forward earnings (chart). It is not just a LargeCap story, either. Forward earnings for the S&P 500, S&P 400, and S&P 600 all are rising to record highs together (chart). II. Valuation While earnings are soaring, valuation multiples are contracting. The S&P 500 forward P/E is 19.2, with the S&P 400 at 15.8 and the S&P 600 at 15.1 (chart). All three are down in recent weeks. FEMO isn't being matched by fear of missing out (FOMO). As a result, investors are getting more earnings per dollar than they were at the start of the year. The PEG ratio tells the same story. It has fallen to 0.75, the lowest reading of its 30-year history (chart). Investors are skeptical of industry analysts' heady earnings expectations. Compare that with 1999. Then, investors bid multiples to extremes that long-term earnings growth (LTEG) expectations never justified. Now the reverse holds. Analysts' LTEG estimate is 26.0%, while the forward P/E has declined so far this year (chart). Analysts are exuberant. Investors are not. III. Performance The Magnificent-7 had a good week, with the MAGS ETF up 1.3% while the S&P 500 Ex-Magnificent-7 ETF fell 0.7%. The year still belongs to the Impressive 493. XMAGS is up 15.2% ytd against 12.8% for the S&P 500 and 5.3% for MAGS (chart). The bull market has broadened as we expected. IV. Bonds The 10-year Treasury yield is 4.77% and has been trending higher since the spring (chart). It remains inside the 4.00%-5.00% "old normal" range we have argued is the right one for this business cycle. The yield is now pressing against its January 2025 high of 4.81%. A move above that would likely test 5.00%. We would view that level as attractive rather than alarming.
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S&P 500 FINANCIALS SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
BNY MELLON: FORWARD LTEG, STRG & STEG
S&P 500 SECTORS: ANNUAL EARNING GROWTH FORECAST
WELLS FARGO: FORWARD OPERATING EARNINGS PER SHARE
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