Price Target: $6000?!
The stars are aligning
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Our thesis is proving to be correct. Despite the violent selloff in the first week of Sept, we made the decision to hold, and it’s now paying off. SPX ended the week at all-time highs, with the QQQ and IWM following closely behind. This is why we spend time deciphering the macro economy — our “no recession” call gave us conviction to hang tight.
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Today’s topics: Hot inflation, FOMC minutes, corporate earnings exploding, economic supports, technical warnings, investment edge, SPX price target, sectors to focus on.
Hot inflation
Recent inflation figures exceeded expectations, sparking concerns among investors about a potential resurgence of inflationary pressures. Some have drawn parallels with the 1970s, when inflation surged unexpectedly. However, it's essential to examine the underlying dynamics and separate fact from fiction.
The primary drivers of inflation are already experiencing downward trends. Furthermore, when we exclude the unpredictable food and energy sectors, the core CPI has been consistently decreasing:
Most components of the inflation basket are falling in price. So while the headline number may have come in higher than expected, the broader trend remains down. Indeed the bond market seemed to agree, with treasury yields falling in response to the hot inflation print. That tells you what the market is thinking.
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FOMC minutes
The minutes from the last FOMC meeting had interesting insights. There was contention within the Fed about whether to cut by 25 or 50 bps, suggesting they may not cut another 50bps next month. We’ve been posting that cut expectations are too deep, which proved correct as the 10-year yield repriced above 4% again.
Yields are important to follow because they can trigger SPX declines. The April 2024 and Oct 2023 drawdowns were triggered by a spike in bond market volatility and the 10-year climbing above 4.3%. These conditions could present themselves again…
…however with the labor market decidedly cooling, disinflation in place, and central banks on a cutting path, we don’t think we’re headed for another rate spike. Thankfully.
The meeting minutes presented a more complex perspective on labor market dynamics. Instead of immediately resorting to layoffs, businesses are exploring alternative strategies, such as limiting new job postings, adjusting working hours, or allowing natural employee turnover. We have previously highlighted the tightness of the job market, but that does not necessarily imply that demand is not cooling off. There appears to be a tension between employers' desire to retain their workforce and the waning demand. Maintaining this delicate "easing without layoffs" approach could be crucial in navigating a potential economic downturn.
Corporate earnings exploding?!
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Corporate earnings exploding
Economic supports
Warnings from technical analysis
One more investment edge
How we obtained our new SPX price target
Sectors to focus on
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