6.22.26

In this week's The Week Ahead, I discuss why the economy may be stronger than the headlines suggest, including accelerating earnings growth, a resilient labor market, and how lower oil prices could help ease inflation. Plus, the key economic reports investors should be watching this week.  The headlines are loud. The signals are what matter. 

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Transcript

SPEAKER_00 0:19

Welcome to the week ahead. This isn't a hype show, it's not a prediction contest, and it's definitely not a place today where we try to create a deadline. Now, every episode we step back from the noise and we focus on what actually matters the signals shaping capital, policy, and markets over the next decade, not just the next day. My family and I, uh, we spent the weekend in Pittsburgh for my wife's cousin's wedding. And we had a wonderful few days. We had lots of time with family, uh, good friends, we had lots of celebrating. But the moment that stuck with me wasn't the ceremony. It actually wasn't the reception, even though we had a wonderful time and it was a wonderful wedding, and it wasn't even the food. It was watching my boys interact with their cousins and with people they'd never even met before. So my youngest son, Caden, many of you know who he is, but he turned three just a few days ago. I can't believe he's a three-year-old now. It almost makes me cry. Uh, but throughout the evening, he was doing what kids do. He was running around, laughing, playing with cousins, you know, burning through every ounce of energy that he had. And then something happened that genuinely surprised me and my wife. At one point during the reception, uh, after dinner had been served and the cake had been cut, and you know, everybody everyone was starting to make their way to the dance floor, Caden simply walked out there by himself. Not with me, not with my wife, you know, not even with his cousins. It was he was all by himself. And before long, he was dancing with members of the bridal party. Uh, you know, and this is people he had never met before. Nobody encouraged him. Uh, we did not prompt him to do this, he he just did it. And I remember looking at my wife and thinking, when did this happen? You know, not the dancing, but the confidence. Because the reality is that you know, confidence for him didn't suddenly appear that night. Uh, it it's been developing for for months and years in ways that we just couldn't see. The dance floor was simply the first visible evidence of that. And, you know, as parents, uh, some of the sweetest moments are when you realize growth has been happening beneath the surface long before it becomes obvious. And in many ways, that's really what I think investors are seeing in the economy right now. The headlines remain noisy, interest rates are dominating conversations. Of course, we've still got geopolitical tensions, and that creates uncertainty. But the markets continue making new highs. And yet, beneath all of that noise, there are several signals suggesting that the underlying economy may actually be stronger than many people realize. Now, I want to start with corporate earnings because the SP 500, it recently reached another new high. And whenever markets make new highs, uh, people naturally start asking whether we're entering bubble territory. And it's a reasonable question, but one of the more interesting developments this year is that while stock prices have moved higher, corporate profits have grown even faster. And in fact, the market has actually become slightly cheaper on a valuation basis. And I want to spend a little bit of time on that because I think that's important. So the forward price to earnings ratio, that's just a technical metric for how expensive or cheap the stock market is. It's it's essentially compressed from roughly 22 times earnings to uh to about 21 times earnings. And the key point with that is that analysts have actually revised earnings expectations upward. So that matters. Why does that matter? Well, because a healthy market isn't simply one where prices are rising. A healthy market is one where businesses are earning more money. So the difference may sound subtle, but it's incredibly important. You know, one is speculation, the other is productivity. One depends on enthusiasm, and the other depends on actual business performance, which is what matters. So just like Cadence confidence didn't suddenly appear the other night on the dance floor, uh, earnings growth doesn't suddenly appear in a quarterly report. The report is simply where we begin to notice what's already been happening beneath the surface. Now, the second signal that I want to talk about today comes from the labor market. Uh, we've got approximately about 159, almost 160 million Americans that are employed. Now, that's the highest number on record. Uh, recent employment data has continued to come in stronger than a lot of people have expected. So, as a result of that, investors have pushed back expectations for future Federal Reserve interest rate cuts. Now, when people hear that rate cuts may be delayed, they often presume that's bad news. But I think it's worth looking at it from a different angle. If the economy is strong enough that it doesn't need immediate support from the Federal Reserve, well, that's actually a positive signal. Think about parenting for a moment. As parents, I'm sure we all can put ourselves in this position of who have has or have had kids. There's a there comes a point where you're no longer holding your child's hand every step of the way. Not because you don't care, you know, not because they don't still need guidance, but because they're becoming capable of doing more on their own. And the economy actually appears to be showing some of those same characteristics right now. Growth's continuing, you know, people are working, we've got businesses that are investing, and consumers are spending. And so, because of that, resilience, the Federal Reserve has the luxury of being patient. You know, sometimes no intervention is actually a sign that things are working as intended. Now, the third signal comes from the energy markets. Over the last several weeks, uh, you know, we've had these geopolitical developments that have involved the United States, Iran, and all of that's been around reopening the Strait of Hormos. And that's helped push oil prices lower. So oil's moved back kind of towards that mid-70 range barrel. And while you know, that may not sound particularly exciting, it's actually one of the more important developments that we as investors are watching out for and should be watching. Energy touches almost every part of the economy, right? If you think about it, transportation, manufacturing, shipping, travel. And so when energy costs decline, businesses face less pressure and consumers keep more money in their pockets. So, in many ways, you know, it's kind of like a lower energy cost, it's kind of like a tax cut. Not because anybody passed legislation, but because households simply spend less filling up the car, you know, paying for goods whose costs are influenced by energy prices, and pretty much everything is influenced in some form or fashion by energy prices. So for much of the last several years, energy has been a significant contributor to inflation pressures. So lower oil prices helps remove some of that pressure. And that's a constructive development for uh both consumers and businesses alike. So, what does all of this mean for you and mean for me? I think the message is relatively simple. The headlines may suggest fragility, but the underlying data suggests resilience. Corporate profits continue to grow, the labor market remains pretty healthy, energy prices are moving in a more favorable direction. Now, the reality is, and you and I both know this, but the reality is it does not guarantee smooth sailing from here. Um markets don't move in straight lines. We talk about this all the time. Economies don't move in straight lines, and we know that life certainly does not move in a straight line. But when we focus on the signals instead of the noise, the picture remains more encouraging than I think many people assume. As we look ahead this week, there are two reports that I think we really need to be paying attention to. Now, today we've got the the Federal Reserve's annual bank stress test results. And you know, think of that as just a financial health check for the banking system. And then on Thursday, we've got the latest reading on the PCE inflation index. Again, fancy word that just means, hey, it's the Fed's preferred uh measure of inflation. And so together, those reports should provide a really useful snapshot of whether the banking system continues to handle higher interest rates well and whether inflation is continuing its gradual path lower. Now, I'll leave you with one final thought. Watching Caden, my son Caden, on that dance floor the other night, it reminded me that growth often happens quietly before it becomes visible. The same is true in investing. The most important developments are rarely the ones making the loudest headlines. They're usually happening beneath the surface long before anyone notices. And our job as investors, it's not to react to every headline, it's to stay focused on the signals that actually matter. And when volatility inevitably shows up, as it always does, remember this volatility can feel like turbulence. But turbulence doesn't mean the plane is bad. It just means we're flying through. Thank you for listening. We'll keep watching the signals that actually matter until next time.