Cinco De Mayo
- Brandon Mull, CFA, CFP®
- May 8
- 3 min read
Writing this week on the 5th of May, or “Cinco De Mayo” as it is known in some circles, has us thinking about tacos, and maybe a few margaritas as well. Aside from the obvious culinary aspect of the delicious traditional Mexican dish that has come to be associated with this week, we’re looking at the market landscape for reasons to celebrate. However, much like the recent spring weather in the Midwest, while the climate improves, there are a few grey clouds threatening to rain on the party. |
Depending upon one’s political lens, the Trump administration’s actions in recent weeks regarding Iran could be interpreted as a “TACO” of sorts, as there seems to have been a backing down from the most overt assertions and threats of military action. Less cynically, the moves might be interpreted as part of a broader strategy for peace and resuming trade, having achieved (or hoping to achieve, soon) their desired political objectives. Regardless of interpretation, it seems inarguable that all sides have de-escalated the conflict, rather than escalated – something we (and markets, it would appear) have taken as a cause to celebrate. In place of direct armed conflict, an indirect conflict now slogs on under auspices of a fragile truce. With naval blockades in place by the U.S., as of this writing, some escorted shipping traffic has resumed in the Strait of Hormuz.
In addition to naval traffic, a stream of fresh data releases showed steady US economic growth. Real GDP (Gross Domestic Product) grew at 2% in the 1st quarter, while initial jobless claims show continued labor market strength. Inflation readings in the PCE looked a touch high, mainly due to oil and insurance costs, but manageable. Break out the margaritas, right? Well, not so fast. As the U.S. economy attains record levels of GDP, we are also setting records with our national debt. At $31.27 trillion, it crossed the Rubicon, exceeding GDP for (effectively) the first time since World War II. While this isn’t an immediate concern, and a topic we’ll touch on more in the future, it is certainly a grey cloud on the horizon that will have to be dealt with eventually. Perhaps more interesting to us, at least at a granular level, is something strange happening with corporate earnings. Strategist Warren Pies of 3Fourteen Research noted recently that earnings estimates have been accelerating markedly, even booming (as in 25% annual growth booming) as the year has unfolded. The graphic below gives an illustration. He further observes that this type of growth rarely happens unless the economy is recovering from a recession.  What’s more, the 327 companies that have reported earnings so far (65% of the S&P 500): Overall, 87% are beating estimates, and those that “beat” are beating by a median of 6% and that impact is spread across industrials, financials, consumer stocks, utilities, communication services and other sectors. This diffuse growth demands an explanation, and the only one we can come up with is that the US AI Investment cycle is not extracting profit from a fixed pie, it’s growing the pie itself. As demand for AI infrastructure and GPUs from Nvidia flows to construction firms, to electrical utilities, and to manufacturers who supply those systems, those revenues end up in wages and consumer spending that in turn boost other sectors of the economy. Trends in productivity and strong corporate margins appear to back this story. Don’t get us wrong, various risks are still hanging over markets including everything from supply shocks due to high oil prices, to a new Federal Reserve chair, to mid-term elections. Disciplined investing requires balance and sometimes, a dash of cognitive dissonance to remain focused on the big picture, even while other narratives may prove valid at the same time.
Recent readings: Balanced Risks – Citadel Semi Surge vs. Macro Realities – Bob Elliot, Unlimited Funds The return of history: gold, the dollar, and the monetary future - Deutsche Bank |