Daily Commentary

MarketMinder’s View: This leads with the sensible observation that “the stock market is not the economy,” but then it argues this time may be different because business investment in artificial intelligence (AI) is driving economic growth. And driving that investment? “The so-called Magnificent Seven—U.S. tech companies that now make up a record 36% of the S&P 500’s market value ... Whether this is a bubble is perhaps the biggest question facing the stock market and the U.S. economy at large. While the extraordinary capital expenditure on AI over the past year may only represent about 1% of U.S. GDP, its impact on growth has been massive. Some reckon as much as one-third of the economy’s near 4% annualised expansion over the past two quarters may be accounted for by this digital gold rush.” We agree tech has been driving business investment growth lately, and perhaps some of it may prove excessive over time. But a few things. First, unlike the dot-com bubble’s bursting a quarter century ago—due to euphoria blinding investors from deteriorating fundamentals (namely, rapidly mushrooming losses)—the Magnificent Seven (collectively) are massively profitable. Their outsized earnings largely back up their outsized market cap. (Please note here that MarketMinder doesn’t make individual security recommendations; specific companies named are incidental to the broader theme.) Second, bubble talk like this is usually self-deflating. Rampant AI skepticism counterintuitively shows euphoria isn’t prevalent. Third, while AI and related data-center buildouts may be driving capital expenditure (which could bust without the requisite return on investment), the connection to consumption (“the lion’s share of GDP”) is a stretch. The piece posits “wealth effects from outsize gains in stock market indexes” are powering household expenditures, but that is a myth. Meanwhile, real disposable personal income excluding government transfers (per the St. Louis Fed) is hovering near record highs and trending upward, supporting spending—most of which is nondiscretionary (think rent, insurance, healthcare, food, energy and utilities). Folks, stocks still aren’t the economy. Rather, they are a leading indicator pricing in corporate earnings expectations about 3 to 30 months ahead—and the economic conditions supporting that—based on all available forward-looking information. On that score, trust the market: With stocks at record highs and sentiment warming but not euphoric, the economy’s outlook remains fine.

MarketMinder’s View: Last week, Fed head Jerome Powell remarked that “equity prices are fairly highly valued.” Should investors be concerned? Not if history is any guide, as the article notes: “The S&P 500 has posted an average 12-month return of nearly 13% following previous valuation warnings by Fed chairs dating back to 1996 ... when former Fed chair Alan Greenspan warned investors about ‘irrational exuberance’ in 1996.” Back then, stocks had another four years of bull market. The piece goes on to describe how “Powell’s comments echoed valuation warnings from previous Fed chairs like Janet Yellen, Ben Bernanke and Greenspan—none of which spooked the market into an immediate correction.” Now, this article doesn’t get into why valuations don’t determine stocks’ direction. Allegedly high-valued stocks can always go higher (and low ones lower)—there is no preset valuation threshold that will trigger investors to collectively bid stocks up or down. This is because surprises move markets most, and valuations—as all the attention attests—are anything but. They also reflect past performance. That said, we do find it interesting that more and more market analysts are arguing investors shouldn’t put much stock in the Fed head’s comments—perhaps a sign of warming sentiment. Granted, some of the experts here are warning against complacency, so there are some skeptical pockets. But overall, the consensus has taken a more optimistic view of the market, which is worth monitoring.

MarketMinder’s View: This article sees a gap opening up between Wall Street optimism and Main Street pessimism, resulting in the titular flashing “recession indicator.” As the summary up top states: “Wall Street remains optimistic about avoiding recession, but consumer confidence is sliding, with the Conference Board’s Expectations Index falling further into recessionary territory in September. Confidence in business conditions and job availability has weakened sharply, raising concerns that the spending power underpinning corporate growth could falter. While inflation expectations eased slightly, they remain elevated, and economists warn the looming government shutdown could further obscure the economic picture by halting key data releases.” But an ongoing bull market and “recessionary” consumer confidence aren’t incompatible. After all, stocks climb a wall of worry, which people spy aplenty. Reality—or people’s feelings about it—doesn’t have to be objectively “good” for stocks to keep ascending. It just has to exceed expectations, and with those “recessionary” outlooks, we see a low bar to clear. As for the government shutdown and the supposed “void” of official economic releases, don’t fret that, either. Markets aren’t flying blind. Government reports are always in the rearview for stocks, which continually look anywhere from 3 to 30 months ahead at all available data. Missing public releases may make that somewhat harder to reconcile, but they aren’t a fundamental market impediment. Then too, government shutdowns are nothingburgers for the economy and stocks. While they may pair with higher short-term volatility at times, they have never led to lasting downturns. We don’t see this one any differently whether short (days) or long (weeks). For more, please see today’s commentary, “Government Shutdown: Stocks Don’t Sweat the Squabbling.”