August PPI, Fed Implications, and Fresh Uncertainties
Questions surface over 2025 EPS Prospects, October government shutdown
US equity futures point to yesterday’s move higher continuing when those markets open later this morning. Before we get there, however, the market will have to contend with the findings inside the August Producer Price Index (PPI) report. Yesterday’s August Consumer Price Index (CPI) saw core CPI for the month not only come in higher than expected on a sequential basis, but the 0.3% reading continued the upward trend that started with the July data. In addition, at 3.2% on a year-over-year basis, core CPI is still quite a distance from the Fed’s 2% target. Paired with other data, the likelihood is the Fed will deliver a 25-basis point (bps) rate cut as it begins its rate-cutting cycle next.
We’re not the only ones who think the market may be getting ahead of itself with calls for 100-125 bps before the end of the year and more than 200 bps by June 2025. Sergio Ermotti, Group CEO of UBS Group AG shared he thinks “the market seems to be a little bit too ahead of the curve in expecting the Fed to go so aggressively.” Should today’s August PPI contain any not so nice surprises, it would be another reason to think that when the Fed shares its updated set of economic projections for 2024, 2025, and 2026, they may underwhelm hopium-infused investors.
Questions emerge for 2025 EPS expectations
Coming off Nvidia’s comments at the Goldman Sachs Communacopia conference yesterday, folks may be paying a bit more attention to similar presentations today and as we close out the week. They’ll be looking for insights for the soon-to-be-over September quarter and sharpening expectations for the December one. But some are already starting to take a hard look at 2025, including expected S&P 500 EPS. We’ve shared our view about how aggressive the market consensus of ~15% EPS growth for next year is for that market barometer.
Roth MKM is joining us in that thinking, sharing that history shows analysts’ 12-month earnings forecasts tend to be about 30% too high at cycle peaks. As we think about it if the Fed needs to deliver more than 200 bps in rate cuts over the next nine months, it’s another reason to question such a degree of expected EPS growth re-acceleration. We expect as we move past the September quarter earnings season, 2025 EPS growth prospects will become a greater topic and one that could once again call into question the market’s valuation. As you know with our models, we aren’t ones to buy the market but look for opportunity in companies positioned to benefit from structural tailwinds.
October government shutdown?
And as this week’s 2024 presidential debate fades, we are facing another potential partial government shutdown on October 1. Yesterday, House Speaker Mike Johnson canceled a planned vote on a stopgap funding bill that could keep the government open for the next six months after more than a dozen Republicans walked back their support for it. What could make this round of debt ceiling negotiations even more challenging is the presidential election and calls by some to include the SAVE Act, which would require people to show proof of citizenship to register as a voter. Congressional Democrats have vowed to vote against any spending plan paired with the SAVE Act. While the likely outcome will be some deal to keep the federal government open, we wouldn’t be surprised if it turns out to be another nail-biter and something that helps September live up to its market reputation.
Model Musings
Aging Population
“People are living longer and birth rates are down. For instance, the share of the old-age population — those 65 years or older — in the U.S. is expected to grow to 21.5% from 18.1% over the next decade, the bank said. China’s growth is expected to be more rapid, with its older cohort increasing to 21.6% from 14.6% during that time, per the analysis.” Read more here
Artificial Intelligence, Cloud Computing, Digital Infrastructure
“Amazon plans to spend about $10.5 billion over the next five years in cloud and artificial intelligence infrastructure in the U.K., as global tech companies boost their data-center footprints amid a boom in demand for artificial-intelligence computing… Like many top tech companies, Amazon has been ramping up its spending on the data centers, real estate and chips needed to meet the surging demand for computer power that has come with the rise of AI.” Read more here
Artificial Intelligence, Space Economy
“A novel AI-powered weather model inspired by language-processing systems invented by Google is helping meteorologists at Cape Canaveral Space Force Station avoid disruptions to the busy launch schedule along Florida's Space Coast.” Read more here
Cash-Strapped Consumer
“Over the course of the quarter, our credit challenges have intensified,” Ally Chief Financial Officer Russ Hutchinson said at the Barclays Global Financial Services Conference in New York on Monday. “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture… We’re clearly dealing with a cohort of borrowers … who have been struggling with cost of living and now are struggling with an employment picture that’s worse,” Read more here
Cybersecurity, Data Privacy
“Keeping your credit card details safe from hackers just got a whole lot more difficult following a new data breach at a payment gateway provider that affects almost 1.7 million people… Slim CD says that full names, physical addresses, credit card numbers and card expiration dates were all obtained as a result of the breach. However, card verification numbers or CVVs weren't stolen according to the company.” Read more here
Homebuilding & Materials
“An analysis conducted by USA Today/Homefront using data from Realtor.com found that the median American home is now 128 square feet smaller than five years ago, and yet it costs $125,000 more. Shrinkflation, by definition, is what happens when companies reduce a product's amount or volume per unit without changing its retail price. The concept evokes images of candy bars sneakily getting smaller over the years, or bags of chips and cereal boxes getting emptier, a phenomenon known to outrage consumers.” Read more here
“Consumers have a well-informed outlook,” Hale said. Realtor.com expects rates to fall through the end of this year to 6.3%, and to continue to drop in 2025, due to the Fed’s expected rate cuts and a falling spread between mortgage rates and rates of other risk-free assets. Fannie Mae said in its August housing forecast that it expects the 30-year mortgage rate to average 5.9% by the fourth quarter of 2025. It also expects home-price growth to decelerate over the next year.” Read more here
Space Economy
“SpaceX, Blue Origin and United Launch Alliance (ULA) have been chosen to provide launch services for the U.S. Space Force. The three companies will compete for National Security Space Launch (NSSL) contracts worth up to $5.6 billion across fiscal years 2025 through 2029, the U.S. Department of Defense announced on June 13. The contracts are part of the NSSL Phase 3 launch services program. At least 30 NSSL Lane 1 missions, which head for low Earth orbit, will be launched over the five-year span.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.