Daily Commentary

MarketMinder’s View: We think investors’ worries about a top-heavy economy—high earners driving spending versus those less well off—are unfounded since markets focus far more on overall economic growth and not sociological matters surrounding its composition. But because of widespread fear that the economy is liable to topple as a result, it is worth presenting evidence to the contrary. As noted here, “Economists warned that consumer spending growth was increasingly reliant on wealthy Americans, leaving the economy vulnerable to a stock market downturn or any other wealth shock.” (Since the article references research from some American banks, please note MarketMinder doesn’t make individual security recommendations, as our focus is on the broader theme only.) However, recent data dampen this concern. “After-tax wages rose 5.2% in July from the same period a year ago, surpassing the wage growth rate for higher-income households for the first time since December 2024.” From our perspective, lower-wage earners are starting to see the catch up in real wages they typically do after inflation squeezes, like Milton Friedman long taught. Now, perhaps that doesn’t make consumers feel better about the economy, but feelings aren’t predictive—and to us, recent wage data are in line with other figures underpinning the US economy’s stealthy strength. For more, please see last year’s commentary, “So Go the Top Earners, So Goes the Economy?”

MarketMinder’s View: With Q2 earnings season mostly in the bag, silly season seems to be upon us. (Once again, because the article references some specific firms’ research, please note MarketMinder doesn’t make individual security recommendations. Our focus is on the broader theme only.) “As the latest reporting season nears completion, all signs are indicating the second quarter was one of the best three-month periods in recent memory with profit growth running at more than 30%. The only problem? That torrid pace is unlikely to last. The consensus currently expects growth to fall below 20% in the first quarter of 2027 before moderating into the mid-teens for the full year ...” which seems fine to us? The article notes markets tend to do better when earnings growth is above trend and accelerating rather than above trend but decelerating—based on limited historical evidence—but we think that is more of a function of how stocks move most on the gap between reality and expectations. Early on in market cycles, expectations tend to be low, making it easier for accelerating earnings to surprise more positively. Later in the cycle, as sentiment warms—and earnings growth decelerates—not so much. Note too, it isn’t last quarter’s earnings that matter as much as the next 10. Something for investors to keep in mind as sentiment warms.

MarketMinder’s View: We see three hits and two misses on the takeaways here for July’s inflation reading. As the first notes, headline and core (ex. food & energy) CPI inflation readings ticked down a tenth of a percentage point to 3.4% y/y and 2.5%, respectively. “Both numbers helped feed a narrative that while inflation is still a problem, it seems less so after two consecutive months of benign readings.” We would lean more on the “benign” part as we don’t think inflation is problematic—prices have returned to their prepandemic growth trends and, outside energy, they haven’t budged from those this year. But the second takeaway frets, “Crude oil has jumped 10% over the past week, posing upside risks for the August CPI reading unless things cool down in the Middle East.” That may lift CPI’s energy component, but without galloping money supply growth, prices are unlikely to accelerate broadly. Inflation still looks benign to us longer term. We also award a point to the third takeaway since it notes that “Owners’ equivalent rent [OER], an important category that puts a hypothetical rental value on owner-occupied properties, has held fairly steady during the same period.” Now, “important” is in the eye of the beholder, but given OER makes up a quarter of CPI, the acknowledgment here that it is imaginary—no homeowner pays this—counts as a hit in our book. The fourth takeaway also gets it right, putting it all together, “Were it not for all the turmoil in the Middle East, inflation outside of food and energy—especially the latter—would be heading right back to target.” Lastly, though, as is customary, inflation reporting attempts to pinpoint what it means for the Fed, which we think is useless speculation, including takeaway five. As noted, markets were pricing in a “70% or so probability” of a Fed rate hike a month ago—and not so much now. Yes, the Fed is “data dependent,” but there is no way of knowing exactly how. Voting members aren’t predictable. We suggest tuning the noise out. For more, please see today’s commentary and counsel: “On Inflation, Look Past Today’s Headlines.”