It is difficult to not be bullish.  The economy, while showing some modest signs of softening domestically (e.g., consumption), is generally strong globally.  Market performance remains robust, operating rates are expanding, and corporate profits expectations are revising higher and broadening.  It is, at the same time, difficult to not harbor some skepticism.  The perception (among some) that there remains continued need for government “tools” to bolster economic activity would seem to stretch the definition of a strong, self-reinforcing economy.  Moreover, equity valuations have shifted higher, into the upper strata of their historical range where the forward return profile is not particularly robust for new money.  Still, there appears little to put the domestic bull market into abeyance – we remain bullish ‘til the bill comes due.

We have long held that the principal building blocks of equity prices are earnings and interest rates.  Trends in both appear supportive over the intermediate-term.

Valuations, while stretched, are benefitting from continued optimism for corporate profits in 2H’24 and into CY’25. Under the surface the earnings recovery for the broader S&P – outside the Magnificent 7 and some adjacent growth darlings – had been slower to materialize this cycle.  Trailing S&P EPS finished CY’21 at ~$209 and then spent the next eight quarters between $215 (2Q’22) and $223 (4Q’23) before “breaking out” to a new cycle high of ~$226 in 1Q’24. The culprit has largely been the mismatch between softer-than-expected post-pandemic revenue growth and higher-than-expected cost pressures. The uptick in labor expense has been notable but several tenants of our broader “De-Globalization” theme, notably trade relations, natural resource procurement and supply chain strain, have also caused margin compression.  These pressures appear to be abating, however.  With aggregate profits breaking out of a two year range, we were cheered to see three important signposts of earnings health improve in recent months: the divergence between the percentage of S&P sub-industries expecting (NTM) and delivering (TTM) positive earnings growth has narrowed – with estimates in an upward trend; earnings growth excluding the strongest sector (i.e., the “weakest” 10 sectors) has turned higher after a period of contraction; and, the S&P 500 “PEG” ratio (the P/E ratio divided by the earnings growth rate) has continued to move lower.  Strategas is estimating S&P 500 EPS to grow +8% this year, 2024 vs. 2023, and +10% next year, a touch below the consensus. 

Though history suggests rate cuts are better feared than hoped for, the market appears to have disregarded this analogue and continues to lean into markets providing (relative) policy accommodation.  As Don Rissmiller, Strategas’ chief economist, has put it, “a central bank pivot has started to develop globally.”  The ECB has cut – and appears poised to be somewhat aggressive (3-4 cuts by year-end).  The Fed is likely to join them in Sept. – but signaling from the Committee suggests members are undecided on timing and scale.  Data in the U.S. remains mixed.  What if the data remains mixed?  Inflation and the volatility of inflation expectations appear anchored – for now.  There’s been a package of improving U.S. inflation data in the past several weeks.  In our opinion, September is still live for a Fed rate cut.

In May, we increased exposure to Developed Markets from Neutral to Overweight within our risk-adjusted tactical allocation portfolios[1] as the cyclical tailwinds appear a touch stronger across developed economies.  Domestically, policymakers seem intent on leveraging every tool at their disposal to prime the pump ahead of domestic elections.  In this bullish ‘til the bill comes due environment, the thematic setup becomes quite compelling.  In our work four themes continue to gather the thematic momentum we find compelling:

Artificial Intelligence – While still early days for the business use, i.e., the benefits must accrue beyond the purveyors of the technology, A.I. is likely to be an important driver of organic growth that will continue to attention and capital from tech and non-tech corporate operators looking to expand their franchise. 

Cash Flow Aristocrats – At its base level, companies basically have seven decision points for capital: three return OF capital options (Buybacks, Debt retirement, and Dividends); three return ON capital options (Acquisitions, Labor, and Capex); or Retained Earnings.  With the economy digesting tighter financial conditions, economic opportunities for capital have become increasingly competitive.  Strong free cash flow begets optionality.  Companies with optionality have an advantage when the competition for capital intensifies. 

De-Globalization – The gnawing uncertainty (and opportunity) of multi-polar world is likely to result in the continued breakdown of long-held, post-World War II, operating conventions.  The industrial implications will, in our view, be numerous impacting everything from trade relations & supply chains, natural resource procurement & energy security, and defense alliances, to technology alignment & IP sharing, and labor.   

Industrial Power Renaissance – Global population growth, Artificial Intelligence, Electric Vehicles, Re-Shoring, the continued regulatory debate over traditional and alternative sources of energy, are all contributing to a re-examination of the developed world’s needs and sources of power.

Nicholas Bohnsack

[1] Strategas manages eight global allocation portfolios using ETFs for investors risk profiles ranging from “Aggressive Growth” to “Capital Preservation” plus “Core Bond.” 

This communication was prepared by Strategas Asset Management, LLC ("we" or "us" or “our”). This communication represents our views as of 06/26/2024, which are subject to change, and are presented for illustrative purposes only. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

Strategas Asset Management, LLC is an SEC Registered Investment Adviser affiliated with Strategas Securities, LLC, a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser. Both Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.