US Labor Market
September job gains topped modest expectations, but year-over-year payrolls growth appears to have fallen below stall speed. We remain concerned about US activity.
The odds have risen that we have reached a “Metaverse Moment” – a situation where investors punish AI companies for increasing capex. This warrants greater caution towards AI stocks specifically, and the broader S&P 500 more generally.
The September employment report probably won’t convince enough hawks to vote for a rate cut in December.
Tariffs are fading in importance as companies successfully mitigate cost pressures and preserve profitability. The recent wave of high-profile layoffs is more concerning, but there does not appear to be a systemic reason behind the announcements. However, emerging labor market softness could pose a major risk for equities. We remain vigilant.
In the absence of official government data, investors are turning to alternative sources to gauge the direction of the US economy. Our analysis of this data suggests that the economy has continued to expand at a moderate pace over the past two months. If the Supreme Court were to strike down the tariffs, this would reduce the near-term odds of a recession while raising the odds of overheating.
The Fed cut rates today, but a follow-up rate cut in December is uncertain. It will depend, in large part, on who wins a debate about the neutral rate of interest.
Treasury yields are generally following the pattern of past interest rate cycles, but with a larger term premium keeping the curve steeper than usual.
In this Q4 Strategy Outlook, we discuss where we stand on our recession call, the outlook for stocks and bonds in various scenarios, why investors are misunderstanding the impact of AI on corporate profits, whether the US dollar has entered a structural downtrend, our perspective on the yen, gold and other commodities, and much more.
The K-shaped economy aptly describes the bifurcation between low- and high-end households but it’s not something investors should celebrate if they want the expansion to continue.
In Section II, Jonathan shows how valuation-adjusted fundamental momentum has been a successful tool for ranking global sectors.