Prospects of Rate Cuts Push Equities Higher

Equities moved higher last week at the prospect of rate cuts next month.

Futures for the Fed Funds Rate moved in favor of 3 rate cuts at the next 4 FOMC meetings. On top of that, Fed governor Kugler announced an early exit from the FOMC board two weeks ago and the President has named Stephen Miran as her potential replacement (pending Senate approval). Miran formerly served in the Treasury Department and has been a critic of the Fed's current pause on rates.

As equities continue to move higher, questions about valuations and economic growth

have caused some to expect recession on the horizon. Valuations are being compared to the Dot.com bust, and rightfully so. However, unlike the Dot.com bust, earnings are actually delivering. So far, realized earnings for the S&P 500 Index are tracking 2x greater than final estimates at the end of June. Unlike the Dot.com bust, which had plenty of "P" (Price) movement and not enough "E" (Earnings), this market is being driven by both the P and the E. Meanwhile, on earnings calls this quarter, mentions of "recession" have plummeted at least 87%.

Economic growth continues to confound the doubters. The latest numbers from J.P.

Morgan show that most costs for tariffs are being born by businesses and foreign exporters, not the consumer. In fact, consumers are realizing less pass-throughs than during the 2018-19 trad war. The Atlanta Fed is estimating Q3 GDP to come in at +2.5% and the weekly numbers measured by the Lewis-Mertens-Stock Weekly Economic Index have been trending higher since the end of May. Watch out for seasonality, but stick to your investment plan.

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