BCA Indicators/Model
On Friday, the MacroQuant equity z-score fell to -1.01, below the critical -1 threshold that often coincided with bear markets in the past. With that in mind, today, I am downgrading stocks to a slight underweight on both a 3-month and a 12-month horizon.
May CPI data show no evidence of passthrough from energy prices to core inflation. This will keep the Fed on hold for the time being.
The AI boom will increase inflation in the near term and could also raise it over the long term. The Fed’s reluctance to hike rates is understandable, but it risks amplifying what may already be a brewing stock market bubble.
MacroQuant recommends a slight underweight position in equities, favors a below-benchmark duration stance in fixed-income portfolios, is very positive on the US dollar, downgrades gold to underweight, upgrades copper to overweight, and remains very bullish on oil.
The AI bubble is a different type of bubble. It is primarily an earnings bubble rather than a valuation bubble. Like all bubbles, the AI bubble will burst. For now, however, our AI demand indicators do not suggest that this is imminent.
Democrats are likely to win big in this year's midterm elections. Our new quant model still slightly favors Republicans for the Senate, but we expect the oil shock to deliver surprise Democratic victories.