Tariff refunds are apparently helping to boost corporate earnings growth. No matter how you analyze it, earnings momentum peaked in the second quarter and will decelerate in the upcoming quarters. Investors should not panic as the S&P 500’s earnings growth decelerates to around a 30% annual pace, since price-to-earnings (PE) ratios remain under compression. In my opinion, the stock market remains grossly undervalued relative to the bond market.
Speaking of the bond market and interest rates, I remain convinced that the Fed will not be increasing key at its upcoming Federal Open Market Committee () meeting in September. One big reason is that Fed Chairman Kevin Warsh at said that isn’t meaningfully slowing and vowed to bring it back “at sufficient speed” to the Fed’s 2% goal, which he described as a “firm and fixed” target. Furthermore, Warsh said that he believed that “the wiser course was to await new information,” particularly given “possible developments in supply chains, investment flows, and geopolitics … before deciding whether a change in interest rate policy was advisable.”
I was pleased that the Fed Chairman also talked about the AI boom and the incredible productivity gains it is unleashing. Warsh said his new task forces at the Fed are studying the impact of AI and productivity gains on the U.S. economy and implied that there appears to be no negative impact (e.g., inflation). Overall, Treasury yields were not significantly impacted by the Fed Chairman’s speech, but the U.S. dollar strengthened during Warsh’s speech, so that was a positive development.
The August report that will be announced on Friday may stop interest rate speculation, since if there is another lackluster payroll report, the Fed should not increase key interest rates. Furthermore, most of the inflation is energy-related, which the Fed cannot control. Despite a flare-up in fighting between Iran and the U.S., prices typically moderate after Labor Day as worldwide demand ebbs. The drawdown in crude oil prices after Labor Day may not be as dramatic as it has been in the past since strategic crude oil inventories have been depleted around the world, so I expect crude oil prices will remain firmer than normal until inventories are replenished.
Long-term, crude oil prices are headed lower, since President Trump recently announced the “biggest oil deal in world history” and said the U.S. has secured majority control of more than 65 billion barrels of Venezuela’s proven oil reserves. Trump said the agreement was reached through Secretary of State Marco Rubio, Secretary of War Pete Hegseth, Venezuela’s interim president Delcy Rodriguez, and private business “at no cost to the American Taxpayer.”