U.S. Federal Reserve Chair Jerome Powell’s semi-annual testimony is set to take place on Tuesday and Wednesday. The NATO summit starts on Tuesday as well. China’s June consumer price index (CPI) and PPI are on Tuesday night. The U.S. CPI for June and China’s imports/exports for June are both reported on Thursday and the U.S. PPI comes on Friday.
Friday is also the official start of earnings season with Bank of New York Mellon Corp., Citigroup Inc., Fastenal Co., JPMorgan Chase & Co. and Wells Fargo & Co. set to report results. For the Treasury auctions, there will be a US$58 billion three-year auction on Tuesday, a $39 billion 10-year auction on Wednesday and a $22 billion and a 30-year auction on Thursday. There is a lot for the markets to digest this week.
Something is not adding up very well. We see huge uncertainty in economic performance and the market is priced for perfection. We see a scenario where Joe Biden steps down and Kamala Harris becomes the U.S. President before the Democratic Convention in August. We see a 22 times multiple on a 1.5 per cent gross domestic product (GDP) economy.
Historically, when the economy is performing weaker relative to expectations (red line), the stock market tends to see a correction phase. Our chart shows that when the Bloomberg U.S. economic surprise index is below zero, the S&P 500 Index performs poorly for a period. When the economy is outperforming expectations (green line), we tend to see a period of strong performance.
The current divergence is the most notable since 2006/2007 when markets rallied with poor economic performance relative to expectations. Back then, the Fed tightening cycle hurt the leveraged homeowner, but today that factor is not significant. The bottom line message remains cautionary, but FOMO and rate cut expectations continue to drive multiple expansion rather than earnings growth. The vast majority of the recovery from 2022 has been multiple expansion.
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