Weekly Insights
Weekly Webcasts
Join us every Monday for expert market commentary and analysis. Our weekly webcasts cover key market developments, economic indicators, and investment strategies.
The Gunfight At DOGE City
The Bond Vigilantes aren’t saddling up just yet, but they’re on high alert, Ed reports. They’re watching to see whether anti-DOGE gunslingers will cripple the new federal department or whether DOGE will root out sufficient government inefficiencies to enable Trump 2.0 to slow the budget deficit’s growth and proceed on its tax-cut plans. The stakes are high for the US economy and financial markets, as the Bond Vigilantes have never carried more firepower in their holsters. Fortunately, Treasury Security Bessent is keeping the administration mindful of that.
Anatomy Of Full Employment
When others saw labor market weakening last summer, we saw normalization from the settling down of pandemic-period churn. Our labor market outlook remains constructive. The growth of the labor force should continue to slow, but demand for workers will remain strong, keeping the labor market needle at full employment. Strong productivity gains from widespread AI adoption and a full-employment labor market should spur robust real wage growth. Strong wage growth should keep consumer spending growth and GDP growth strong. All this should keep our Roaring 2020s economic scenario on track. Indeed, January’s labor market data confirm every aspect of our outlook.
Anatomy Of Gross National Product
Why is the US economy so strong? Look in the mirror: The consumer is the engine of growth. Yes, technological advancements will continue to buoy GDP, as will Trump 2.0 deregulation and lower taxes. But consumer spending accounts for nearly 70% of real GDP. We reject the notion that consumer spending will slow in the face of depleted saving and other drags; it’s too resilient, which is why the economy is so resilient. Likewise, we don’t expect capital spending to slow notwithstanding a weak Q4; companies still have much to gain from investments in AI and other technological innovations. That’s the linchpin of our productivity-led Roaring 2020s outlook (55% odds) and higher S&P 500 price targets for the rest of the decade.
Anatomy Of The Bull Market (Will DeepSeek Sink It?)
The current bull market has been driven mostly by valuation expansion; now valuation is historically high. We expect earnings growth to perpetuate the bull market this year; any more valuation expansion could leave the market vulnerable to a meltdown. Our year-end target for the S&P 500 is 7000, based on a solid rise in earnings with no further valuation expansion. … Much of our optimism rests on the Magnificent-7 remaining magnificent. If they don’t disappoint investors, the S&P 500 likely won’t either given their hefty collective share of the index’s market capitalization. … However, a competitive threat to their magnificence has emerged from China: DeepSeek, with reportedly cheaper AI. Could DeepSeek deep-six the Mag-7?
Time To Recalibrate Our Three Scenarios?
Expectations for more rate cuts this year than previously expected buoyed both bond and stock markets last week. The prior week was bad for both markets as rate-cut expectations diminished. But last Thursday’s comments by Fed Governor Waller that fueled the turnaround were wrong-headed, in our opinion. If inflation follows the course he expects down to 2.0%, the Fed’s dual mandate would be achieved so it wouldn’t need to ease further. … Upon reassessing our subjective probabilities for three alternative outlooks for the economy and markets, we’re sitting pat. Our base-case scenario (55% chance) remains the Roaring 2020s. … Supporting that scenario: Baby Boomers flush with wealth and spending it.
The Recession Is Over, Again!
The financial markets have been recalibrating their expectations for monetary policy since the FOMC’s December meeting and their expectations for economic changes under the incoming Trump 2.0 administration since Election Day. In this context, Friday’s strong employment report only served to cement investors’ sense that the Fed should pause its easing. Both bond and stock markets reacted like the sky was falling. We’re not surprised by this January correction, and we view it as healthy: The markets are gaining a more realistic sense of the current situation, recognizing that interest rates will stay higher (i.e., normal) for longer, while the economy remains resilient. A strong Q4 earnings season should help to restore shaken investors’ confidence.
Risks & Reward In 2025
The January Barometer and January Effect have been interesting statistical regularities that may not have much investment usefulness. It’s better to stay in the stock market whatever the month brings than to try and execute exits and entrances based on the calendar. Over time, the market has a bullish bias, which is why we do too. … Today, Dr Ed lists what could go right for the stock market this year—including better-than-expected earnings, technological advances, and a strong economy buoyed by consumer spending—and what could go wrong. On that list, inspired by the worries of more bearish prognosticators, are the known unknown economic effects of Trump 2.0 policies and how the bond market may respond to them.
What Could Go Wrong & Right Up Ahead?
Ed and Eric look forward to the new year.
2025 Outlook
Ed and Eric look forward to the new year.
Inflation: The Good, The Bad & The Ugly
Lots of crosscurrents are converging to determine the course of inflation in 2025. So projecting that course takes seeing where those currents are headed, predicting with the aid of historical correlations how they’ll likely impact inflation, then overlaying potential economic scenarios to see how they change the narrative. The result: Dr Ed’s three inflation scenarios—the Good, the Bad, and the Ugly. In the Good, rising productivity growth moderates inflation even as it spurs economic growth; that’s the crux of our Roaring 2020s economic scenario and is the most likely scenario to play out. The Bad is a witches’ brew of possibilities with bearish inflationary consequences. The Ugly involves a geopolitical crisis catapulting oil prices. That ’70s show seems farfetched these days.
Roaring 2020s Tour Deep In The Heart Of Texas
As Taylor Swift ends her Eras tour, Dr Ed starts his Roaring 2020s Tour to meet with our accounts. Last week in Texas, they shared their concerns about the “known unknowns,” as the new administration represents a significant policy regime change. On balance, Trump 2.0 should perpetuate our Roaring 2020s scenario. Fortunately, the US economy and financial markets are resilient and tend to outperform globally whomever occupies the White House, thanks to Americans’ indomitable entrepreneurial spirit.
Live Long & Prosper!
Today, Dr. Ed examines Baby Boomer economics. The Boomers are sitting on sizable nest eggs that continue to expand along with home prices and stock prices. They are starting to spend more of their net worth as they retire. Many Boomers are not empty nesters but have grown children living at home and are providing them with financial support. The population bulge that has had outsized effects on markets in the general economy at every life phase is now the wealthiest and healthiest generation in history—and spending like it. That’s one of the many reasons we remain bullish on the US economy and stock market.
Is Trump 2.0 Bullish Or Bearish?
With economic growth robust and the stock market at a record high, we’re living the Roaring 2020s now. The economy’s resilience has been remarkable considering the headwinds it has faced. While the outlook under Trump 2.0 involves lots of moving parts, we don’t see the net effects of his policies jeopardizing the Roaring 2020s’ continuation. In this scenario (with our 55% subjective probability), Trump 2.0 might boost productivity and economic growth, keep inflation subdued, shrink the federal government, slow the growth of government spending, and narrow the federal deficit. Among the biggest of the many challenges ahead: not inciting the Bond Vigilantes.
Trumped
The US Constitution was designed to promote gridlock. But the benefits of gridlock are undermined by lawmakers’ spending freely because the Constitution lacks a balanced budget requirement. … Gridlock is good for investing, but the stock market tends to do well no matter who is in the White House. Trump’s proposals—representing a radical change from Biden’s policies—are likely to materialize because he won a clean sweep. Today, Dr Ed examines their ramifications for financial markets. In the “cons” column: Trump’s trade policies and expansion of the federal budget deficit. In the “pros” column: his corporate tax cuts and deregulation plans. Also, we think the inflationary impacts of Trump’s policies could be offset by low energy prices. His deportations might be similar in scale to previous administrations’.
The Fed: Neutral Or Bust?
Something’s amiss with Fed Chair Powell’s explanation for lowering the federal fund rate a second time in two months despite an economy he admits is performing remarkably well. He tied the rationale for the move to the theoretical “neutral FFR,” implying that monetary policy needs to be less restrictive to reach that point, even though that point is intrinsically unknowable. Also implied was that the related risks are worth taking—including potentially overheating a strong economy, untethering inflation, and inciting a stock market meltup. Eric and Ed disagree that risking all that for an elusive goal makes sense.
Bond Vigilantes Are Fed Up
The bond market seems to be ignoring developments that usually halt rising yields in their track. Investors seem focused instead on the stimulus—both fiscal and monetary—that’s likely coming to an economy that doesn’t need it. The effective result: The bond market is tightening the economy itself. The Bond Vigilantes are back and threatening to take the 10-year Treasury bond yield up to the 5% realm. That ought to give FOMC members pause.
Valuation In A Resilient Economy
Goldman Sachs’ bold projection that the next 10 years may be a “lost decade” for stocks, with mere 3% annual returns, is unlikely in the extreme, says Dr Ed. It seems to rest on the assumption that valuations in the future will be lower than today’s. Even without expanding valuation multiples, earnings growth would likely boost the S&P 500 price index at a pace that’s at least twice Goldman’s projection, and returns would be more like 11% a year including reinvested dividends. Furthermore, in our Roaring 2020s economic scenario, earnings growth and valuation—and the index’s appreciation potential—would be even greater than that, driven by a technology-led productivity boom.
Life In The Fast Lane
The Fed’s monetary decisions are only as good as the data they’re dependent on. But economic data can be misleading for several reasons. What looks recessionary may simply be a temporary anomaly that gets revised away or followed by strong data the next month. Today, Dr. Ed makes the case that the Fed’s September decision to cut the federal funds rate by 50 basis points was too much, too soon, as subsequent data have shown. If so, inflation could halt its moderating trend and stock market valuations could inflate unduly in a meltup scenario.
Happy Second Birthday!
As the bull market turns two, Dr. Ed fondly recollects the performance of the young raging bull. At times, the bull charged and at times stomped its hooves on the ground in reaction to the monetary policy, earnings expectations, and economic outlooks waved in front of it. Yet the bull trampled even our heady expectations this year, passing our year-end S&P 500 forecast ahead of schedule. At the risk of more hoof marks, we’re maintaining our year-end targets of 5800, 6300, and 6800 for 2024-26. They reflect a bullish earnings outlook, which reflects rising profit margins in our Roaring 2020s scenario, hinging on a tech-led productivity boom. We might increase our 30% meltup odds if the bull keeps charging ahead over the remainder of this year.
A Dozen Reasons For None-And-Done
It takes a lot to kill an economic expansion, often a credit crisis during periods of Fed tightening that escalates into a credit crunch and a recession. The latest tightening has ended, and that didn’t happen. Now the latest batch of strong economic data should finally lay to rest the diehard hard-landers’ recession warnings. It should also cast doubt on whether the Fed needed to ease at all on September 18. Ed and Eric think not and predict that the Fed won’t cut the federal funds rate further this year. Dr Ed offers 12 reasons that “none-and-done” would be the Fed’s most prudent and plausible policy path for the remainder of the year.
No Hard Feelings
The permabears have fueled much negativity about the outlooks for the US economy and stock market. Their analyses often don’t hold up to scrutiny. Today, Dr Ed puts the prospects of a recession and a bear market into perspective, historically and in light of recent BEA data releases. The data show the economy to be remarkably resilient, including the goods producing sector. … With a strong economy and no recession in sight, why did the Fed ease last week? Answer: To boost demand for labor and reduce unemployment. But easing won’t rectify a mismatch between the skills employers seek and the skills job seekers offer.
Fed’s Dream Economy Versus Ours
The Fed is starting a new easing cycle to avoid a recession that we don’t see coming, based on concern about labor market deterioration that we don’t see occurring. Today, Dr. Ed compares and contrasts the world according to the Fed with the world according to our team, explaining the thinking behind both. Notably, the Fed is risking its credibility by easing without regard for election results, as both presidential candidates’ policies would raise the federal deficit in a one-party sweep, an inflationary prospect. We are rooting for gridlock.
50 Basis Points: Baked Or Half Baked?
It’s a foregone conclusion that the Federal Open Market Committee will be launching a new monetary easing cycle by cutting the federal funds rate when it meets this week. But a weighty decision faces the committee: To cut by 50 basis points or not to cut that much? Fifty is the usual amount kicking off an easing cycle, but the economic circumstances are different this time: There’s no recession clearly barreling toward us. Dr. Ed explores the pros and cons of the decision before the committee, concluding that easing by 25 bps would be the wiser course.
Retailers, Markets & AI
The latest batch of labor market indicators has caused a temporary “growth scare,” in our opinion. Concerns that economic growth is slowing have convinced the markets that the Fed will open up the easing spigots and cut the federal funds rate by more than we expect. … Previous peaks in the yield-curve spread suggest that the bond yield is close to bottoming. … There were bright spots in the employment report too: The payroll and household surveys weren’t all that bad.