I just noticed that the dashboard for this week’s market and economic outlook update had some stale values, including for the S&P 500, the Treasury yield curve, and the 10-Year Treasury yield. This is because it relied on the FRED API and those values were not updated on Friday for some reason.

Hence, I offer this new dashboard view which comes from the website I’m developing to offer a micro SaaS service to providers. It has dates explicitly listed for each quote. I also updated the post on the Substack website, which can be viewed by clicking here.

I apologize for the error.

Stock prices fell sharply and the mean expected NGDP growth rate was flat last week, as the Q3 NGDP forecasts also dropped precipitously. Stock market volatility spiked with inflation expectations unchanged.

Notice how the path of expected Fed funds rates were pushed up starting in early 2027, but then dips below the expectations from last week around the end of the first quarter of 2028. This is consistent with the metrics just discussed.

The biggest factor moving the metrics last week seems to have been the much better-than-expected jobs report that included upward revisions for prior months. This sent stock prices sharply lower Friday, and caused the VIX to spike. Guy Berger has a great in-depth analysis on the jobs report, as does Marcus Nunes who adds a useful monetary perspective.

This report is consistent with my claims based on the evidence that suggest the economy is overheating. It’s one more data point to add to the positive NGDP growth rate output gap and the well-above 5% recent NGDP growth. Much like with the internet boom, we must be careful not to read relatively tame longer-term inflation expectations as evidence against loose monetary policy. It’s NGDP that matters.

Given this output gap, the stock market could see a correction of nearly 20% at some point in the next few years, ceteris paribus. That would be just to bring the economy back into equilibrium and assumes the Fed won’t overtighten or keep high NGDP growth going with additional positive nominal shocks.

I haven’t been addressing the standoff in the Strait of Hormuz much in the past couple of weeks, because updates seem to be noise until we see a permanent reopening for the unrestricted passage of ships. The markets are more optimistic than a week ago, but optimism started fading this weekend as oil prices began to creep back up and stock futures prices weakened as of early Sunday evening, EST.

The economy and stock market continue to be fueled by a strengthening AI boom and some monetary overstimulation, helping blunt the impact of many misguided supply-side policies. There’s still every indication that now is a great time to be a stock investor, so long as the higher-than-usual risks are properly taken into account and/or you’re holding for the long-term. The tail risks have certaintly proven to be evident already however, despite seemingly muted effects on real growth so far.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices rose for the ninth straight week as oil and other commodity prices fell sharply due to increased expectations for an agreement to end the dual blockades in the Strait of Hormuz. The S&P 500 is now up over 19% since the end of March, with the VIX reaching its lowest point since January.

Short-term expected NGDP growth declined however. Core PCE inflation came in as expected for April at 3.29% YoY, continuing an upward trend that’s been going on since this time last year. Inflation expectations beyond 5 years remain relatively tame however.

Hence, not much changed for the outlook since last week, which still has a coming slowdown in NGDP growth according to markets, but less extreme than expected earlier in the month. This is reflected in the Fed funds yield curve.

Oil futures prices moved, but are still well-within the range of recent values.

The economy continues to overheat, given that recent NGDP growth has been well-above long-term trend, averaging over 5.5%. This is versus the estimated S&P 500 earnings yields for Q1 at 4.96% and Q2 at 4.26%, leaving a climbing positive NGDP growth rate output gap.

This suggests that more than the recent the 19% gain in the S&P 500 is due to expectations of overheating and will not be sustainable, sans new additional positive nominal shocks down the road as wages adjust to help boost inflation and lower employment.

The economy is still holding up remarkably well given the numerous negative supply shocks thanks again to the AI boom and now increasingly loose monetary policy. While the former may be sustainable in ways no other positive supply shocks were, the US continues to challenge its own prospects with policies that threaten to undermine the very foundations of economic development. Heightened caution continues to be warranted.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices rose for the 8th straight week as the mean expected NGDP growth rate fell again, along with the expected Q3 growth rate. The VIX fell precipitously as part of a continuing trend since late March.

Also, oil prices fell as a bit more hope appeared regarding a possible settlement of the war with Iran. Not much change there, in context.

Fed funds futures continued to rise, but were little changed from the prior week.

Hence, not much changed regarding the outlook for stocks and the economy during the past week. As stated over the past two weeks, he stock market doesn’t have much more to run, sans a positive supply shock, and the economy is expected to slow, starting in next quarter due to Fed tightening to try to avoid overheating. There is no expected recession on the horizon as the AI boom continues to provide the economy with resilience.

Thank you to all veterans for your sacrifices.

Note: I used FactSet as more reliable source for the S&P 500 earnings estimates for Q3 and Q4 this week. Also, I began using the Yahoo! API for the CRB commodity index quote.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices rose slightly last week in volatile trading as the mean expected NGDP growth rate fell amid worse-than-expected inflation reports and rising oil and other commodity prices.

YoY core CPI came in at 2.74%, having risen two consecutive months since the start of the Iran war. The context of recent years provides better perspective though.

Likewise for YoY core PPI for all commodities, which came in at 9.82%, though this rise does not appear quite as benign.

More importantly, longer run inflation expectations reflected in the 5-Year, 5-Year rate were unchanged for the week. Amd while there was much talk about rising Treasury yields, note that this rise is also not so scary in context. This same is true of the 30-Year rate.

And not much changed in the credit default swap market for US Tresuuries, as the 30 year example illustrates.

Scary is the wrong interpretation, even recent historical context aside. This is illustrated in the latest Fed funds futures prices.

Yes, inflation is too high now and monetary policy is somewhat too loose, but the relatively tame longer-term inflation expectations indicate that the longer run higher expected interest rates are due to higher growth expectations, consistent with stock price appreciation and the AI boom. Hence, the falling mean NGDP growth expectations are likely due to front-loaded short-term slower expected growth.

That said, as I pointed out last week, there’s not much room left to run for stocks over the short-term if the Fed respects its inflation target. We’re only about 3% below it (2.35% / 2.28% - 1) in core PCE terms now, leaving little room for additional appreciation sans a positive real shock. Such shocks have been common in recent years however, largely due to the AI boom.

Add to the concerns about overheating the recent and expected NGDP growth output gaps, and there’s still good reason to believe there’s a short-term NGDP growth slowdown, though not recession, on the horizon. The continuing stalemate in the Strait of Hormuz won’t help, but oil price futures still show significant backwardation.

So the tug-of-war between supply shocks and the AI boom continues, with monetary policy adding complications. The tail risks will remain significant with this administration in office. Caution is warranted in the short-term, and optimism in the long-term.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices rose sharply last week, as the mean expected NGDP growth rate fell slightly. The VIX rose as did long-run inflation expectations. Hence the growth the S&P 500 signaled is mostly unsustainable nominal growth. The mean expected NGDP growth rate at 4.82% is above any reasonable trend baseline for YoY NGDP growth. There is a growing positive nominal output gap, confirmed by the 5-year, 5-year inflation expectations approaching the Fed’s 2% target in core PCE terms. This would make the Fed reconsider it’s plans to lower interest rates later this year, if it level-targeted NGDP. I pointed out last week that these higher inflation expectations are not due to higher commodity price expectation.

Interestingly, there’s been a big shift up in expected Fed funds rates in the past two weeks.

The low has shifted up nearly 60 basis points. This is obviously consistent with an economy that is quickly heating up. Despite this, the expectations for the next few Fed funds rate decisions have barely changed.

As labor market economist Guy Berger points out, the labor market is also slighly heating up, despite a series of negative supply shocks including tariffs, immigration restrictions, and the oil and other commodity shocks due to the war with Iran.

So now, the Fed’s increasingly misaligned policy is becoming more important than these various supply shocks. We can still see a roughly 3% gain in the S&P 500 before the Fed can be expected to begin tighter monetary policy in the near future. That assumes that political pressure doesn’t interfere with the Fed’s otherwise usual tendency.

Don’t be surprised for some more short-term gains in stock prices, with larger evnetual losses due to Fed correction or over-correction a bit further over the horizon.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate rose last week, as did long-run inflation expectations and the yield curve. The US economy continued to improve despite oil prices rising in response to somewhat diminished optimism regarding a near-term resolution to the Strait of Hormuz standoff. Though WTI oil prices have not reached the highs of those during the opening weeks of the 2020 Russian invasion of Ukraine, the CRB index reveals that commodity prices are nearly 16% higher.

This helped result in a 3.2% core PCE inflation rate in March, and a 5-Year, 5-Year forward inflation expectation rate that is now only trivially below the Fed’s 2% target in core PCE terms.

It’s still not oil prices pushing up those longer-run inflation expectations though, as prices 5 years out are not much different than they were pre-war. Monetary policy really has been loosening lately.

Nonetheless, the AI boom continues to intensify with AI-related stocks leading the way. For example, AI-heavy ETFs such as AIQ and WTAI are up nearly 27% and 36% respectively since reaching 2026 lows on March 30, representing rapidly rising earnings expectations. This is compared to more conventional SaaS and cloud services ETFs such as IGV and CLOU, which are up roughly 13% and 15% respectively over the same period. Their year-to-date lows though fell on April 10, so their recoveries since then are more impressive than stated, but still illustrate the continuing bifurcation. About 10% of the rise in the S&P 500 is due to rising inflation expectations, with the rest of the over 13% rise due to rising earnings expecations.

Meanwhile, the Fed had an interesting meeting last week in which the decision was made to hold rates steady, but there were 4 dissenting votes. That was the most since the Greenspan era. 3 were in favor of somewhat tighter policy due to inflation concerns and one, Miran, was more dovish.

Powell is expected to soon be replaced as FOMC Chairman by Kevin Warsh, but plans to remain on the FOMC. I laid out my concerns about Warsh a bit in last week’s post. Hopefully, he won’t be influential enough to destabilize economic growth with more pro-cyclical monetary policy.

So, who will win the tug of war between policy chaos and AI investment and productivity gains? Markets are increasingly giving the edge to AI. However, obviously this is a very risky investment environment due to the potential for more harmful policy changes. I would not bet against US technology in the long-run.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate rose again last week, along with inflation expectations, oil prices, and market volatility. This continues to underline the stock and oil futures market perception that this standoff with Iran will be relatively short-lived. In fact, the S&P 500 has hit new all-time highs two weeks in a row, now up more than 13% since late March. Oil futures prices continue to suggest that the oil shock will improve quickly through the end of this year. Possible resolution does seem more likely to me now than prior to the imposition of the US blockade of Iranian shipping in the Persian Gulf.

Meanwhile, the US labor market continues to hold up well, though labor economist Guy Berger warns that the effects of higher oil prices are yet to come. There’s every indication that the economy is still fundamentally strong, though growth expectations continue to be expected to fall for the remainder of Trump’s term. S&P 500 earnings expectations support this narrative.

On that point, I’ve changed two indicators of NGDP growth expectations in the blog’s weekly dashboard. The next two quarters of NGDP growth expectations are now quoted, along with expectations for the next year. These are all based upon S&P 500 earnings estimates reported by FactSet. How these earnings estimates are translated into NGDP growth expectations is explained in this blog’s User Guide.

One piece of good news last week was the announcement of the dropping of the criminal investigation of Fed Chairman Jerome Powell. This helps clear the way for the nomination of his replacement as Chairman, Kevin Warsh. Warsh has laid out some details of a broad monetary policy reform agenda, including the following items (see links here, here, and here, for example):

1. Reform of the Inflation Metric

Warsh argues that traditional Core PCE is a lagging and “imperfect” signal that fails to capture underlying trends in a high-productivity economy. He prefers metrics like the Dallas Fed’s Trimmed Mean PCE, which strips out extreme price outliers (both high and low) to find “generalized” price changes. This metric generally shows inflation rates lower than those of core PCE.

He has also proposed a partnership with government statisticians to implement a real-time, high-frequency survey of a billion prices to capture the digital and AI-driven economy more accurately. This could be like the Billion Prices Project.

2. A Rules-Based Nominal Anchor

Warsh aims to end the era of “pure discretion” and “central planning” by tethering the Fed to a predictable framework. He rejects the Fed’s reliance on subjective two-year forecasts, arguing instead for a framework where the central bank takes absolute responsibility for the nominal path of the economy.

While this might initially sound good to a market monetarist’s ears, he’s not proposing an NGDP target, but instead is emphasizing inflation targeting with the kind of flexibility that caused the excesses of dot-com boom and subsequent crash. More on this below.

3. Shrinking the Balance Sheet

Warsh views the $6.5+ trillion balance sheet as a distortion of market signals and a form of “fiscal policy” by the back door. He advocates for shrinking the balance sheet with “unprecedented speed” to restore the dollar’s scarcity value. He proposes an unconventional trade-off here: reducing the balance sheet in exchange for lower policy rates. He believes removing balance-sheet distortions allows for lower interest rates without fueling inflation.

While I like the idea of shrinking the balance sheet and returning to a corridor system, his rationale is very dubious, even apart from the focus on interest rates, which are dependent not independent variables.

4. The “New Productivity Cycle” Thesis

Warsh views the current era as a “1990s Redux,” where AI and technological diffusion are driving a structural supply-side boom. He argues that if productivity is rising, the Fed should “look through” high growth and potentially even cut rates, as supply-side gains keep prices naturally subdued. He rejects the “dogma” that high wages or strong growth are inherently inflationary, focusing instead on whether money is being “over-printed” relative to productivity.

Of course, what he misses is that if NGDP growth rises above expectations, which may be associated with some long-run baseline mean, inflation will rise with a lag. This very procyclical inflation target mentality is what caused the Fed to over-stimulate the economy during the dot-com boom, leading to a bust after inflation finally showed up. This was a far broader boom than tech, as the S&P 500 boomed and then fell more than 46% during the bust.

5. Institutional & Communication Overhaul

To reduce what he calls “market manipulation” via rhetoric, Warsh seeks a more disciplined Fed. He wants to move away from telling the market exactly what the Fed will do months in advance, preferring a more “opaque” but data-driven approach that restores market-driven price discovery.

He has also pledged to return the Fed to its “core remit” (price stability and employment), explicitly removing it from climate change and social policy discussions. However, the climate change discussions was only with respect to managing bank balance sheet risk over time, which is well within the Fed’s mandates.

Overall, this does not bode well for monetary policy going forward, to the degree he’s successful in implementing these “reforms”. While some details are still vague, there’s a real danger that such changes will lead to less stable economic growth. However, for now, the AI boom continues slow the decline in economic growth due to multiple supply-side challenges and there’s still no recession on the horizon. It still appears to be a good time for the stock market, with the understanding that the tails of the risk distribution continue to gain weight.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate rose sharply last week on news of a potential deal to begin to end the standoff over the closing of the Strait of Hormuz. However, the good news was short-lived, as Iran announced the Strait is again closed, due to a stated failure of the US to live up to the deal. The US continued its blockade of Iranian shipping through the Strait after the deal was announced. The 2027 expected NGDP growth figure reported above was updated this Sunday morning EST, while the other figures quoted were as of the stock market close on Friday. The May WTI oil futures price is up nearly 6% from Friday’s last price, as of now.

Given the updated WTI oil futures curve, markets still believe the situation in the Strait has improved over last week, despite shots fired today by Iran at some ships attempting to transit the Strait and those fired by an American Navy destroyer that hit a ship attempting to reach an Iranian port, before seizure of the vessel. If the US can maintain an effective blockade against Iranian shipping through the Strait, perhaps a deal to permanently open the Strait for all traffic can be reached.

This improvement in expected oil prices notwithstanding, the Fed Funds futures curve fell a bit this weekend, in line with 2027 NGDP growth expectations. This suggests that a nominal shock also occurred, representing a minor tightening of monetary policy. While the 5-Year inflation breakeven rate continues to run hot at over 2.20% in core PCE terms, inflation expectations over the subsequent 5 years remain below the Fed’s target. The latter should be the metric to inform an inflation targeting decisions.

So, despite a seemingly better outlook for ending the war with Iran, prospects for economic growth and further stock market appreciation slumped a bit. Watch out for further real shocks from the Trump administration and/or the Iranian government, and further market-expected mistakes by the Fed. Markets are still not predicting a recession.

PS: I added some statistical test material in the User Guide that supports the NGDP Growth Rate Output Gap measure. The bottom line is that positive output gaps predict weaker future stock market performance and NGDP growth within a 4-5 year time frame, consistent with the claim that there is an equilibrium relationship between the S&P 500 earnings yield (using same quarter earnings) and the NGDP growth rate.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate rose sharply last week, as a fragile ceasefire agreement with Iran was announced that did not lead to a resolution to the conflict in subsequent negotiations. Thus, Trump has now announced a blockade of Iranian oil shipments, sending S&P 500 futures prices down and oil prices higher as of this Sunday night. The current WTI oil futures market prices show that prices aren’t expected return to pre-war levels until roughly early 2029.

The YoY core CPI figure for March was released last week, coming in at an increased but rather mild rate of 2.60%. The 5-Year inflation breakeven is elevated, but is only at 2.58%, indicating inflation is not expected to worsen soon. The 5-Year / 5-Year forward inflation expectation rate remains below the Fed’s 2% target in core PCE terms.

Interestingly, the Feds Funds futures market is predicting falling rates until roughly just after Trump leaves office.

Does this indicate slowing real growth expectations due to growing uncertainty regarding Trump’s behavior as the next Presidential elections approaches? This seems the most defensible explanation I’ve pondered, considering that stock prices are not predicting a nominal shock of that magnitude and that inflation expectations aren’t reflecting looser monetary policy or the Fisher effect due to falling oil prices.

Hence, if markets are to be trusted, the US economy is expected to continue to grow, but at an increasingly slower rate perhaps due to Trump uncertainty, followed by significant gradual recovery through 2030. I hope they are right.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate rose last week, in part due to a better-than-expected BLS March jobs report. As Guy Berger correctly states, this positive report should be put in the context of recent months, which indicates a labor market that’s held up well in the face of the trade and immigration shocks. However, most of the effects of the Iran war on oil and other natural resource prices have yet to be felt in the labor market, as employers assess how permanent the Gulf crisis will be. They should negatively impact future jobs reports if the crisis drags on.

The best market-based estimate I can currently develop for NGDP growth one year from now is around 4% or a bit less, depending upon the baseline mean NGDP growth figure used. This is based upon a forward S&P 500 earnings yield of ~5%, using same quarter earnings estimates published by FactSet and S&P 500 futures prices. This back-of-the-envelope calculation is based upon the equilibrium relationship between the S&P 500 earnings yield and the US NGDP growth rate.

Obviously, the biggest visible risk to earnings growth continues to be the continuation and/or deepening of the crisis in the Persian Gulf. Policy signaling from the administration has been inconsistent, to be kind, contributing to uncertainty around the timing and likelihood of a resolution. As long as constraints on energy flows persist, higher fuel prices and shortages of key inputs will continue to weigh on the real economy.

I see no more hope of a quick positive resolution to this crisis than I did last week. Making a deal with this American government seems uniquely challenging. Iran continues to have strategic leverage. I hope I simply lack the expertise and imagination to see a quick end to this crisis. The economic and stock market outlooks would remain positive in that case, with the understanding that recent behavior by the US government has only underlined the risk of additional, needless negative real shocks.

Below is an example of Trump’s measured approach to negotiations this week:

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate fell for the 5th straight week, as hopes for a quick resolution to the Iran war and related energy supply shock continued to fade. The S&P 500 is now down nearly 9% from its all-time high reached in late January, just about a month before the start of the war. The VIX finished up above 30 and the the 5-Year, 5-Year forward inflation expectation rate fell further below the Fed’s implict 2% target in core PCE terms, to finish at about 1.71%. Markets are increasingly expecting the Fed to fall behind as the economy slows, implicitly tightening monetary policy to add to current woes. Indeed, as I pointed out last week, the Fed Funds futures curve is actually predicting a rate hike soon. There’s no justification for a rate hike when NGDP growth expectations and even inflation expectations are falling.

Obviously, the odds of a recession are hence continuing to rise. The US economy was already leaning heavily on the generative AI boom as the trade and immigration shocks took their tolls. Markets are not yet predicting recession though of course, because if they were, we’d already be in a recession. The expectations would move the actual event forward.

I wish I could say I’m more optimistic than markets, but actually I’m less so. It puzzles me that markets are only gradually coming to the conclusion that there is no rational decision maker on the US side, and I’m not sure those in Iran are rational. After all, we don’t even know who they are at this point. The level of uncertainty is rather astounding.

What does seem clear to me is that, at least at the moment, Iran has the leverage regarding control of the Strait of Hormuz. Also, if their existence is sufficiently further threatened, they have some scorched earth options, such as attempting to poison the water supplies of a few neighbors’ desalination plants, leaving major cities without water supplies for extended periods. The Trump administration doesn’t strike me as a trustworthy negotiating partner and I doubt the Iranians disagree. Hence, there are serious challenges to a deal being struck, however reaching one might work. I hope I simply lack knowledge and imagination on this point. I’m far from being an expert. I only sense that the tails of the tail risks are fattening.

So, the long standing outlook regarding the ever slowing soft landing continues to crack, with the soft landing being pulled off the table by incredibly reckless US policy mistakes. I was on the edge about hedging as recently as last week. I’m increasingly leaning toward hedging as the US government is only seeming less rational as this crisis unfolds, with the US arms to escalate the war heading toward the region. This along with the Fed’s recent behavior suggests that too many trends are heading in the wrong direction.

PS: I’m considering abandoning trying to establish appropriate baselines for market-based NGDP growth forecasts and moving to forecasted changes in NGDP growth instead. Please let me know what you think.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate fell again last week, largely as a result of nominal shocks given that Fed policy is expected tighten a bit in an environment of rising inflation.

As you can see in the above chart, the Fed is actually expected to raise rates late this year. This should not happen, of course, since inflation expectations are well-anchored below the Fed’s 2% target in core PCE terms, but markets believe they are still not entirely above making the mistake of failing to completely see through temporary supply shocks. More fundamentally of course, inflation is the wrong variable to target, as has been mentioned many times in this blog. The procyclical policy continues, though it is much more subdued so far than in the past such as during pre-pandemic cycles.

While I’ve been saying for many months now that the outlook hasn’t fundamentally changed from one of a gradual slowdown while coming nowhere close to a recession, uncertainty is rising regarding this outlook. Not only has the Iran war and the seemingly growing general erratic nature of the Trump administration introduced doubts, but the AI boom may be raising the productive potential of the economy for the foreseeable future, if not permanently. The outlook could end up worse or even better than expected.

Hence, I have some serious doubts about the calculations I made and/or the earnings estimates used regarding the new annual NGDP growth forecasts. I used a baseline NGDP growth rate of 4.49%, which seems to fit recently updated reported NGDP data given prior S&P 500 earnings yields (using same quarter earnings), but I’m skeptical about falling NGDP growth forecasts for the next three years. I will seek additional alternative earnings estimates to replace those that S&P Global discontinued reporting a few weeks ago. Any ideas or other input from readers will be appreciated.

That brings me back to the topic of my paid subscriptions. Due to the current limitations on available data for NGDP forecasts, I’m ending them this week. There will no longer be content unavailable to unpaid subscribers. I will partially refund current paid subscribers as needed and as possible. Donations are welcome for those who’ve expressed interest in continuing to financially support the blog. I thank you for your support.

PS: Markets seem to think this oil shock could for quite sometime:

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate fell for the third straight week, largely as a result of the deepening supply shock caused by the restriction of shipping through the Strait of Hormuz. WTI crude prices briefly spiked to nearly $120 early last week, settling at $99 Friday.

There is no apparent end to this situation in sight, but it may continue to be highly fluid, especially considering the somewhat less than orderly decision processes in the White House. That said, It’s hard to imagine the Iranians won’t require some kind of deal to reopen the Strait, absent the US finding a way to gain control of it.

The S&P 500 is now down roughly 3% for the year-to-date, as the real shocks which include tariffs and immigration restrictions in addition to this war are finally threatening to turn growth negative without a short-term resolution to the oil shock. Markets are not yet predicting recession, but falling NGDP growth and inflation expectations indicate there are limits to how much the AI boom can offset such shocks. The Fed is expected to keep rates steady this week with very high confidence.

While Q4 real GDP growth was revised down last week, it was still robust in year-over-year terms, remaining just over 2%.

So the revisions and some new data over the past couple of weeks indicate the economy was not quite as strong as thought, but it is still quite resilient. This leaves stock investors with a conundrum. To hedge or not to hedge? I wish I could provide insight here, but the decision seems like a coin flip, given the unpredictability of the US government.

Much more important though is what the Fed does. Will the increased noise cause them to add a nominal shock to the problems the economy faces? The 5-Year / 5-Year forward inflation expectation rate continues to slowly sink below the Fed’s 2% core PCE target, but my gut tells me there won’t be a significant long-lived negative nominal shock. I think the Fed has learned to avoid failing to see through temporary inflation due to real shocks. I hope I’m not wrong. Hope of course is not a strategy.

Hence, if there is a recession we won’t necessarily see a big drop in stock prices. As long as nominal NGDP stays on or close to trend, stocks should not suffer much, at least in nominal terms.

Be careful though. The tail risks for additional real shocks are obviously growing.

PS: I’m still working on trying to replace the quarterly S&P 500 earnings estimates that are no longer freely offered by S&P Global Ratings. I’ve been trying to perfect a Python script to construct the estimates from the earnings of the constituent companies. I’m sick this weekend, so I’ll appreciate your patience while I continue to try to find a way to continue offering the market-based NGDP forecasts.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and likely the mean expected NGDP growth rate fell last week, as dual negative real shocks hit the US economy. First there was a much worse-than-expected February jobs report that indicated that more than 92,000 jobs were lost last month, along with downward revisions for December and January. The report for December now shows 17,000 job losses. Even if these numbers hold, job losses do not necessarily indicate a recession and markets still aren’t indicating we’re in recession now. There is still no market indication of a recession.

The second shock was the beginning of attacks on Iranian oil infrastructure and additional disruptions to shipping in the Strait of Hormuz. Iran has responded with attacks on Saudi facilities, while most tanker ships in the Strait pause due to concerns of attack by Iran and its proxies and soaring insurance costs. Ideas publicly floated by Trump to provide US naval escorts and to support cheaper insurance for tankers passing through the Strait have not impressed markets, with the WTI April futures contract now at over $116/barrel. Thus, oil prices are already close to doubling since the war with Iran began last weekend.

It’s probably unnecessary to state that though markets aren’t currently predicting a recession, a worsening and or/prolonging of the crisis in the Strait of Hormuz could eventually bring about negative GDP growth. Worse still, tail risks for additional real and even nominal shocks are now likely increased. Regarding the latter, the current chaos might make the Fed’s attempt to achieve its 2% inflation target more complicated, increasing the odds of a mistake.

I hope this new situation underlines the reasons for my warnings about tail risks since Trump began his second term, for those who may have thought I was overreacting. While most of my readers may agree with me, those who don’t are perhaps becoming convinced that there’s something very wrong with having someone of the worst character who is likely also increasingly demented occupy the office of the US President. As I’ve stated previously, we are in an enormously dangerous situation as long as he is in office. He is “governing” based on ill-motivated whims.

The point is, if you haven’t been hedging already, doing so perhaps warrants serious consideration at this point.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

This blog provides both strategic and tactical signals of sustainability in stock price trends as related to states of disequilibrium in the US economy. States of disequilibrium are caused by unstable monetary policy and follow a familiar pattern in regimes in which central banks target inflation, as does the Fed. Flat inflation rate targeting is pro-cyclical and wages are sticky, so such an inflation target can allow NGDP growth to stray from the long-run trend, over- or under-stimulating the economy and hence causing much instability in stock prices. Sticky wages help cause sticky core prices, as in the Fed’s preferred core PCE inflation metric, such that changes in this metric lag changes in real output.

The strategic signal comes from the expected NGDP growth rate output gap, which is revealed in the spread between the S&P 500 earnings yield, using same quarter earnings, and the NGDP growth rate. This can employ reported, backward-looking data or forecasted earnings, stock price futures, and related NGDP forecasts for forward-looking signals.

This output gap is a good indicator, because there is an equilibrium relationship between the S&P 500 earnings yield and the NGDP growth rate. This reflects the classical economic principle that the rate of return on capital should equal the economic growth rate, in equilibrium. In fact, since 1948, the mean difference between these two metrics is only 0.24%, and is similarly low over many shorter stretches. (Data from Shiller and FRED)

Looking at the bottom chart, that for the US NGDP Output Rate Gap, you can see that periods of hyper- or hypo-stimulation last roughly 4-to-5 years at most. This provides a pretty good estimate of how long such periods can last before wage adjustments cause changes in inflation to which the Fed responds to defend its inflation target. Note the period of hyper-stimulation during the dot-com boom and hypo-stimulation during the Great Recession and slow recovery, along with the extremes reached during the pandemic and its recovery. This metric provides a good guide for whether a “bubble” in stock prices exists and how long it can last.

Of course, the Fed can change its policy short of full wage and price adjustment cycles, and hence a tactical indicator is also useful. The best one I’ve found in recent years is the 5-Year/5-Year forward inflation expectation rate. It reveals market expectations for the average inflation rate for the the second 5-years of the next 10, ignoring the most immediate 5 years which can reflect temporary inflation changes due to supply shocks. It is based on TIPS spreads, which is the difference in yields between inflation protected and non-inflation protected Treasury bonds. Expect Fed action in some short time frame after this measure rises to or above about 2.35%, which is 2% in the Fed’s preferred core PCE terms.

These guides can obviously help investors avoid or hedge against the most extreme volatillity in stock prices, increasing profits.

For more information about the metrics used here, see the blog’s User Guide.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Stock prices and the mean expected NGDP growth rate fell last week, largely on the basis of a higher-than-expected PPI figure and speculation about the beginning of the war in Iran, which began early Saturday morning. WTI oil futures are now up over 5.5% since last week, with shipments through the Straight of Hormuz slowed, but not entirely stalled thus far. This very modest move in oil prices obviously suggests that the market doesn’t expect significant disruption for very long.

Hence, while this war does represent a tail risk I’ve often warned about, it is a minor one thus far in terms of impact on the US, at least in the short-run. That could change, of course. More likely this will make the US less secure in the long-run, as the non-proliferation treaty is undermined and tail risks continue to rise due to the collapse of the international legal order. The world is becoming less predictable and not in a good way.

So, despite the red last week, the outlook has still yet to materially change, with slower growth, but nothing like a recession on the horizon.

Now I want to turn attention to a feature that may be deleted from this blog. Standard and Poor’s has issued their last publication of quarterly S&P 500 earnings estimates upon which my quarterly NGDP growth and NGDP output rate gap forecasts were based. If I can’t find a suitable alternative, I’ll have to restrict those forecasts to one year out, using widely published earnings estimates that factor into forward P/E calculations. If this feature is deleted, I’ll end the paid subscriptions and issue partial refunds as necessary.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices rose last week and volatility fell, though it remained elevated in the midst of a Supreme Court ruling that struck down most of the Trump tariffs. (There was not an update of the S&P 500 earnings expectations this week to inform on the change to the mean expected NGDP growth rate, but it likely rose.) E-Commerce stocks like Amazon and Etsy rose on the news, along with online advertising platforms like Alphabet. Trump responded with his characteristic thoughful humility and announced the imposition of a new general 15% tariff, a day after announcing it would be 10%. The S&P 500 futures are down more than half-a-percent as I write this.

Other news last week included the release of a supposedly disappointing headline real GDP growth figure of 1.3% for Q4 of 2025, though the YoY figure was a much stronger 2.23%. YoY NGDP growth was at 5.58%, obviously implying a GDP deflator of 3.35%. PCE inflation in December was just under 3%, well above the Fed’s 2% target. Inflation expectations however, remained tame and below target at 1.78% in core PCE terms.

Hence, again the outlook for stocks and the economy did not change much. The prospect of rate cuts continued to be pushed forward in time, as has been the pattern for the past few years as inflation proves sticky, due largely to new tariffs and immigration restrictions over the past year. AI has put a floor under economic growth since the imposition of tariffs and this turn against immigration.

The Fed Funds futures rates are consistent with the market-based quaterly NGDP growth forecasts that predict a slowing economy through this year. However, these forecasts extend beyond 2026, with the Fed Funds rates falling until roughly the near end of 2027, and then rising and approaching 4% by 2031. This is consistent also consistent with the NGDP forecasts, which use a baseline expected growth figure of 4.28%.

The never-ending soft landing, by definition is expected to continue. Expect the unexpected, however.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-f

Stock prices and the mean expected NGDP growth rate fell last week along with inflation expectations, as the VIX spiked. The losers were led by Big Tech and the banks over concerns about AI ROI in the former case and disruption to high margin businesses in the latter for big banks. Smaller banks suffered over concerns over credit quality. Outcomes for the SaaS victims of the previous two weeks were a bit more mixed, but with big down weeks for Adobe, Monday.com, Workday, and Intuit among others. AI’s disruption appears bigger and faster than any I’ve witnessed. These SaaS names are down considerably year-to-date.

Overall however, the S&P 500 is only down about a third of a percent this year, while the NASDAQ is down nearly 3%. As I’ve repeatedly stated, this is not an AI bubble bursting. There is no bubble, but we are seeing a lot of mini technolgy shocks.

We’re nowhere near AGI, despite the hype, but we’re also nowhere near a major disappointment in current AI technology. Generative AI technology consists of association engines trained on huge databases, but lacking independent logic, metacognition, real-time learning, or governance by opportunity costs. The caveat that “correlation does not equal causation” richly applies here. There are real limitations to this technology in terms of autonomous agent operation, but that doesn’t mean this technology isn’t powerful, that it can’t be creatively scaffolded to provide enough context for surprising if limited levels of autonomy, and that it isn’t improving rapidly. Also, the mere fact that it is speeding up software development while lowering costs is hugely disruptive in terms of productivity and threats to many SaaS companies.

The macro news for the week was less important, with YoY core CPI coming in at a bit over 2.5% and job gains for January exceeding expectations, without much affecting the outlook. The latest quarterly market-based NGDP forecasts continue to reveal expectations for a gradual growth slowdown through this year.

In short, for the second week in a row, markets were volatile due in large part to “first world” problems, rather than to “third world” political governance. Let’s hope this trend continues.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.

Links to Data:

Economic Data Sources:

https://fred.stlouisfed.org/series/SP500

https://www.wsj.com/market-data/stocks/peyields

https://www.barchart.com/futures/quotes/ES*0/futures-prices

https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.

https://www.cnbc.com/quotes/.VIX

https://fred.stlouisfed.org/series/DTWEXBGS

https://fred.stlouisfed.org/graph/?g=Ee9i

https://fred.stlouisfed.org/series/T10Y3M#0

https://fred.stlouisfed.org/series/DGS10

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://tradingeconomics.com/commodity/crb?user=nunote

https://www.cnbc.com/quotes/@CL.1

https://www.cmegroup.com/trading/en

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.htmla