The Weekly Edge

We think that growth forecasts continue to be “so much more than everything” to risk asset performance, with stable and rising forecasts as the key underpinning of recent risk asset strength.

An aging economic cycle and equity markets that are facing renewed headwinds make Bob Seger’s 1980 classic a fitting analogy for this week’s Weekly Edge, where we are taking stock of the current U.S. equity earnings season.

Expectations for a Fed pivot to rate cuts in 2024 have been “undone” by stickier inflation readings and resilient economic growth statistics, resulting in an “unraveling” of market trades that expected to benefit from a friendlier Fed.

As Federal Reserve Chairman Jerome Powell hosted the post-Federal Open Market Committee meeting press conference this week, he probably should have ditched the suit and worn a black t-shirt and ripped jeans instead, because he seemed to send one Wayne Campbell-like message to markets: “party on!”.

Inflation is lingering around, meaning U.S. economic data continues to support our view that there is little urgency for the Fed to ease policy as swiftly and aggressively as bond markets have been pricing in.

The first and most important point in this analysis is: just because forward returns could be lower in the future does not mean investors should stay out of the equity market. Instead, a period of lower price returns demands greater care by investors in order to reach return goals.

There is more than meets the eye to sector performance within the S&P 500. This week’s Weekly Edge takes inspiration from John Hughe’s iconic film The Breakfast Club to identify strong and weak trends underneath the surface of sectors.

This week’s Weekly Edge looks at the week’s strong semiconductor earnings and details a nascent recovery in broader cyclical activity. This cyclical reacceleration is an important watch item, as it could change the Fed’s path for expected rate cuts, while also impacting equity and bond markets in various ways.
We note that in the past 35 years, the Fed has never begun cutting rates when Manufacturing PMIs were rebounding/reaccelerating. Though this continues to be a “Strange Landing” cycle, we are doubtful that the Fed will move to ease policy in a meaningful way if this cyclical recovery continues.

Like the myth of the “Ramblin’ Man”, whose rough-and-tumble, on-the-road lifestyle was described by the Allman Brothers Band in 1973, most S&P 500 companies and management teams continue to search for the good times while navigating a bumpy road and challenging environment for profit growth.