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It’s been awhile since readers have looked to The Leuthold Group for a rosier take on the stock market than what they can get from Wall Street. But there’s a time and place for everything.

Some were unnerved this week to hear the usually cheery strategist of a major U.S. investment bank predict S&P 500 total returns for the next decade of just +3% per year. While depressing, our work does not find that forecast out of line. We estimate that if S&P 500 5-Yr. Normalized EPS grow at their 1957-to-date annualized rate of +6.3% for the next ten years, and the P/E multiple on those future EPS were to revert to its median level for the same time period (19.4x versus today’s 31.6x), the S&P 500’s annualized total return out to late 2034 would be +2.6%.

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We take a historical look at potential implications of the market’s strong upside momentum for both the stock market and the economy.

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The latest CPI report was a tad higher than consensus. Our scorecard shows the trend of disinflation stays intact.

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Due to a falloff in our sector rankings, exposure to IT in our equity portfolio has dropped sharply over the past year. Elevated valuations, combined with poor relative strength, overbought signals, and slowing growth are the primary impetus for the declining scores.

Market reaction to the latest flood of monetary and fiscal stimuli has been spectacular. While conviction about Beijing’s attempts to revive its flagging economy has been severely lacking, this time we should believe it. It’s certainly the right medicine China needs and the spark of confidence these actions will ignite should not be underestimated.

An economic downtown with little or no forewarning from stock prices is possible, but against the odds. Nonetheless, prior to 1950, there were three cases in which stock market gains failed to inoculate the economy against a recession. Today’s the stock market capitalization has become so large relative to the economy that stock price movements affect the outlook for growth and inflation more than ever before. 

Extreme stimulus announced by China had the desired effect of spiking the country’s stock market. The move did not trigger our EM Allocation Model; however, if the reversal is for real, there is plenty of time. The EM P/E multiple gap is so extreme that one wouldn’t miss out if they prefer to wait for more compelling confirmation than the fireworks of the last couple of weeks.

An excellent forecaster of election outcomes over the last 100 years is the stock market, itself. Measured over the three-month period through election day, if the S&P 500 has a gain, the incumbent party historically prevails; a negative return predicts a loss for the incumbent. This simple method has correctly identified the White House winner in 20 of the past 24 elections.

Read this week's Major Trend. 

Read this week's Major Trend. 

Traditionally defensive themes such as Staples and Utilities have outperformed over the summer months, reminding investors of the benefit of not going all-in on the AI growth theme. Quality is one of the most robust defensive factors, but even so has managed to outperform during the bull market run that began in October 2022.  While some Quality funds are designed to play defense, others seem more inclined to the offensive side of the field. We recommend that investors decide if they are targeting Quality specifically as a defensive exposure or as a core long-term holding to ensure they select the appropriate fund.

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August’s Core CPI was a tad hotter than expected, locking in a 25bps cut a week from today. Markets currently forecast 250bps of Fed easing by the end of 2025. We probably won’t see sub-2% inflation rates until the Spring of 2025.

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2022-24 monetary tightening has been one of the most aggressive cycles in history, but other stimuli may have muted its impact. First, fiscal policy has been conspicuously looser than any prior period of tight money. Second is the stock-market wealth effect: U.S. equity market cap has leapt nearly $12T (~40% of GDP)—a larger wealth increase (versus GDP) than that of the entire 1982-1987 bull market.

The yield curve is back in the spotlight, as the yield spread between the 10-yr. Treasury and 2-yr. Note finally flipped positive on September 4th, after a record 26 months of inversion. While some economists claim this steepening implies a recession is now imminent, the historical record of such “un-inversions” is a mixed bag—in some cases the recession was still eight months- to over one-year away.

Bull markets that lacked a traditional recessionary “father figure” had shorter lives (33 mos. vs. 61 mos.) and produced gains just one-third the size (+63.6% vs. +186.9%). If today’s SPX bull matched the return of its four most-cyclically relevant predecessors, it would extend until May 2025, and top out at 5,852—8% above its September 6th close. (Not great.)

The economy normally fades heading into a series of rate cuts, with higher unemployment and lessening CPI inflation. Risky assets (stocks and credit) do well, and bond yields move lower. Real assets also benefit (gold in particular). On the whole, an easing cycle is favorable for most assets.

Read this week's MTI.

With Fed rate cuts likely to begin just days from now, the mathematical connection between changing rates and duration means that lower rates are almost certain to result in higher bond prices, an effect that has proven reliable since 2024’s high point in rates last April.  The simple approach of targeting longer durations is complicated by today’s inverted curve, meaning that lower rates will almost surely not manifest themselves through a parallel downward shift in the curve, but will be accompanied by an un-inversion that will return rates to an upward sloping shape.  This twist in the curve’s slope will require investors to target the appropriate spot on the curve to optimize the interest rate effect on bond prices.

Read this week's Major Trend. 

Read this week's Major Trend. 

The latest CPI report was in line with consensus. Our scorecard suggests that the modest disinflationary regime continues.

Read this week's Major Trend. 

The Lucky Bull born in March 2020 produced a 114% SPX gain during its short time in the pasture. The Luckless Bull conceived in October 2022 produced an index gain of 58% as of its July 16th peak. If last month’s high becomes the final top for the Luckless Bull, its legacy may be paltry: Current valuations imply the bull’s offspring may suffer from a similarly short lifespan and subdued productivity. 

Market pundits christened the violent rotation in stock leadership as the “Trump Trade.” It’s more likely that the incumbent stock leaders were fated to stall before last month’s wild events. Major inflection points are sometimes accompanied by cyclical turning points in the market itself: The Y2K peak occurred just as the market broadened after two years of hyper-concentration.

The mild CPI report on July 11th kicked off a violent rotation out of mega-cap stocks, with the Russell 2000/S&P 500 performance differential at +4.5% for the day. Other factors reversed as well, with all major styles posting inverse performance relative to their year-to-date numbers.

Is the market overreacting to recent economic data? Concerns about a growth slowdown are replacing the optimistic outlook of early 2024. Our Recession Dashboard shows increased risks, with notable declines in housing, employment, and consumer confidence. Despite this, equity and credit markets remain resilient. As we navigate these uncertain times, discover how upcoming elections and potential economic policies could shape the future.

Domestic equities lost a little over 3% in the second quarter. Seven styles posted declines in that range, only to be countered by the continued outperformance of mega-cap growth stocks, which gained almost 10% for the quarter. This odd mix of returns left the S&P 500 up 4.3%, although that was clearly not the central tendency of equities in 2Q24

With multiple rate cuts nearly assured through year-end, investors can profit from the iron-clad link between changing rates and bond fund prices. But there are two circumstances that introduce complexity: 1) the yield curve will likely un-invert during this process, and the longest duration funds may therefore not experience the strongest price response; 2) potential changes in credit spreads may either enhance or diminish the duration effect felt by corporate bonds.

Confidence was shaken in the bulletproof Mag 7 as only Tesla and Apple (the YTD laggards of the esteemed group) escaped what was otherwise a fairly uniform 5-6% haircut. Those seven magic names shaved 70 bps off the S&P 500’s narrow monthly advance (but still account for half of the index’s YTD performance).

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The S&P 500’s Q2 bottom-up estimated operating EPS sank 3% to $56.38 in the first month of reporting (Chart 1). This is a notable departure from the 2% rise we saw with the first month of Q1 results. One month is certainly not a trend but the most recent data brings some question into the above-average, no-erosion EPS estimates we have grown accustom to.

Read this week's MTI report.

Multi-cap funds face two paradoxes that introduce subtle hurdles into their fund analytics. While it is desirable for a fund to rely on a sound investment process and to follow that process consistently, a successful multi-cap fund might not be able to meet both desires simultaneously. Second, a successful multi-cap fund will always be compared to the highest performing peer group while unsuccessful funds will be compared to a less successful set of peer funds. Attentive fund analysts can overcome the challenges we have identified in this study, assuming they are cognizant of the unique issues facing multi-cap and mid-cap funds. This report is intended to arm analysts with just such insights to ensure that benchmark and peer group comparisons are meaningful and constructive.

Read this week's Major Trend.