/ August 18 / Weekly Preview
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Monday:
N/A
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Tuesday:
Building Permits Prel (1.39M exp)
Housing Starts (1.30M exp.)
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Wednesday:
FOMC Minutes
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Thursday:
Existing Home Sales (3.91M exp.)
Initial Jobless Claims (226K exp.)
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Friday:
Fed Chair Powell Speech -
Monday:
Barrick Mining Corporation
monday.com Ltd.
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Tuesday:CoreWeave, Inc.
Tencent Music Entertainment Group
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Wednesday:
Cisco Systems, Inc.
KB Financial Group Inc
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Thursday:
Applied Materials, Inc.
Deere & Company
JD.com, Inc.
Tapestry, Inc.
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Friday:
Flowers Foods, Inc.
It All Comes Down To Rate Cuts
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Last week, the main equity market indices reached all-time highs midweek before fading into the close on Friday. The soft July CPI print was the main catalyst, as the September rate cut narrative comes into play. Even after accounting for a rather alarming PPI report, the market maintained its bullish composure despite some selling efforts.
By the end of the week, Treasuries finished lower, as rate-cut euphoria was dampened. Friday showed a mixed tape, with ongoing rotation and churn amid sectors and factors. Another series of economic reports were ho-hum: July Retail Sales (+0.5% m/m; ex‑autos +0.3%) and Industrial Production (‑0.1% m/m; manufacturing flat) continue to confirm that there is an overall weakening trend within the consumption economy.
When drawing the line, it looks like 2 macro trends are clashing, and one narrative is quickly dissolving:
Consumer spending remains resilient, and stock market index levels are elevated (good);
Inflation re-accelerated on the production side, which taken along with tame consumer-side inflation means that there is tremendous pressure on corporate margins (not good);
Tariffs had minimal impact on demand and headline inflation so far (the real concern which all but evaporated);
Percentage Change in CPI vs PPI since the start of the year
Depending on what the Fed does next, we’re essentially looking at two types of companies which will stand out going further into H2’25:
Leveraged or Non-Leveraged from a Balance Sheet perpesctive
Positive and Stable cash flow v.s. Negative and Variable
Liquid (large) v.s. non-liquid (small, microcaps)
During the past 3 months, the iShares Russell 2000 ETF (IWM) has kept up with SPY, a feat which is historically uncharacteristic on longer timeframes.
SPY vs IWM 3-Months
SPY vs IWM 3-Years
On Friday, the S&P 500 settled at 6,449.8 after a slight pullback from ATH. The index-tracking ETF which we use for our analysis has managed to maintain a close above the M-Trend level, which is technically bullish. The overall trend remains upward, but there are certain signs of weakness below the surface, as has been the case in the previous week.
Support climbs along with the 50-DMA, now at $620, but we don’t see a high probability of a retracement just yet. GEX is positive on all timeframes and institutional investors have been accumulating SPY in Dark Pools as well. Absent a shock, the market will most likely follow the rules of momentum - objects in motion tend to stay in motion, even if gains prove to be unspectacular (by recent standards at least).
Of course, bears can point to persistent valuation concerns. According to Bank of America, the S&P 500’s price-to-book ratio has surpassed 5.3, a level historically associated with manias and bubbles (1929, 2000’s). Valuations don’t work as timing indicators for stocks, however, so the unwind can also come in the form of rising sales, earnings and EPS — while prices remain consistent.
META (green) and MSFT (grey) lead the recovery from the April lows, while AMZN (orange) and AAPL (teal) struggle in 2025;
From our perspective, there is a large number of top S&P 500 companies which are stretching the limits of their 5-Year valuation range. in the chart below, we are comparing the current Price-to-Sales multiple with the maximum Price-to-Sales multiple recorded in the last 5 years.
If we leave out NVDA and TSLA, companies which will have a very hard time expanding their already huge multiple, the median P-Sales of the remaining 8 companies is 9.98. The max is 10.85, representing just +8.7% valuation expansion potential.
Now to even more fundamental concerns - last week’s inflation data…
The July Consumer Price Index (CPI), the main measure of U.S. inflation, increased by +0.2% from June and remained at +2.7% compared to last year. This was a bit lower than the expected 2.8%. Overall, the numbers indicate steady inflation, showing that tariffs have not caused the inflation rise many had anticipated. This is the main reason markets rallied hard.
We see an increased cost in medical care, though for most families this tends to be a fixed cost related to insurance over a contractual period. It does suggest that once the contracts expire, renewals are going to be more expensive. Energy prices declined and kept headline inflation in check.
Stripping out food & energy (Core CPI), we get a +0.3% MoM climb, and 3.1% YoY. Core CPI has proven stickier, rarely dipping below 3% due to service sector inflation.
The Producer Price Index (PPI) provided an essential piece of the puzzle last week and confirmed an interesting trend: producers are eating the tariffs. They can’t or won’t pass costs to consumers due to growth-related fears. Of course, as investors, this is concerning - companies that cannot pass costs through are bound to record lower earnings and EPS growth due to the erosion of margins.
Given the deceleration in economic growth and personal consumption expenditures, it will only be a matter of time before inflation slows towards the Fed’s target of 2%.
Retail Sales, Real GDP, CPI % change year-to-date
The markets appeared to have overlooked the fact that with slowing inflation also comes a risk of deterioration in economic activity as one stems from another.
Investors currently rely on monetary policy as a force to balance out these fundamental headwinds and justify valuation premiums for the equity market. If rate cuts don’t arrive (or are below what the market expects), we could see quite a sharp reversal on the valuation front.
At the moment, the market is fairly certain a rate cut will occur in September (85% probability). However, since 2008, rate cuts usually came after clear signs of economic problems or financial stress, which are nowhere to be seen at the moment. For example, in 2019, the Fed cut rates three times rapidly due to trade tensions and slower growth which lowered inflation.
In 2020, emergency cuts happened when the pandemic hit, causing inflation to briefly turn negative. Right now, the Fed Funds rate is still much higher than the inflation rate, indicating that monetary policy is too tight, which is why markets expect rate cuts soon. IF the Fed cuts rates, it will be deemed a “preemptive easing to sustain growth while inflation is trending lower.” - in Jerome Powell’s own words.
Our Trading Strategy
Despite the valuation concerns, we do have to respect the fact that the overall market environment is bullish. The logic for last week’s surge is clear: lower headline inflation will make rate-cuts more probable. In turn, lower yields will increase valuations, as the discount rate of future earnings also goes lower.
As such, the most important catalyst to watch next week is the Jackson Hole Symposium. Powell’s remarks could confirm, accelerate, or push back the market's expected rate-cut timeline, which is a key driver of returns at the moment.
If a dovish environment comes to pass, it’s growth stocks and small caps (the risky and economically sensitive part of the equity market) which stand to benefit as long as we don’t get a recessionary outcome longer term.
Current market valuations have already absorbed whatever benefit to the discount rate a lower Fed Funds rate achieves, but it doesn’t really matter in a bull market. For example, in the mid-90’s there was a similar set up where the Fed preemptively cut rates and sparked a multi year bull run which culminated in the .com bubble.
A temporary extension of the U.S.–China tariff truce, decent earnings from the Magnificent 7 stocks, as well as easing geopolitical risk all played a role in supporting a risk-on, bullish narrative.
We’ve already rebalanced our portfolio last week, introducing positions that could benefit from a broad rally in stocks other than the Mag 7 “high fliers”. It remains to be seen whether our thesis proves successful by the end of the year, and we do see the possibility of a consolidation or drawdown in the next period. Once we get past the middle of September, we’ll have the seasonal all-clear to take on more risk and possibly allocate to more speculative names. But until then, “balance” is the name of the game.
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Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
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I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.