Note: Travelling week.

Here we go!

Trump Fires Salvo on North American Trade Pact President-elect signals intention to upend USMCA, wring concessions on immigration and fentanyl

Donald Trump’s new tariff pledges send a clear signal that he wants to rewrite the terms of North America’s free-trade pact and follow through with plans to hit China with tariffs, demonstrating to allies and adversaries alike that he is serious about renewing confrontation over a global trading system that he believes costs the U.S. dearly.

On his Truth Social social-media platform on Monday, Trump said he would levy tariffs of 25% on imports of all goods from Mexico and Canada, accusing both countries of facilitating illegal immigration and fentanyl abuse in the U.S. The Mexican peso fell 1.4% against the dollar in Asian trading Tuesday, while the Canadian dollar lost 1%.

He also promised to levy additional tariffs of 10% on Chinese imports, citing what he says is China’s failure to regulate the chemicals that go into fentanyl. Many Chinese products are already subject to average levies of about 15% after the first phase of the trade war that kicked off in 2018, during Trump’s first term in office. The Chinese yuan shed 0.3% against the greenback in offshore trading.

A 10% extra tariff on Chinese imports is “an opening salvo,” said Joe Brusuelas, chief economist at global accounting firm RSM.

The tariff threat suggests Trump is seeking to include immigration, security and drugs in a negotiation that usually revolves only around trade, as well as accelerate a planned review of the USMCA scheduled for 2026, said Alberto Villarreal, managing director of Nepanoa, a Chicago-based consulting firm that provides services for companies wanting to set up shop in Mexico.

“If Trump follows through with imposing immediate and unilateral tariffs, this would mean ‘going nuclear’ on USMCA,” he said.

Tariffs would likely drive up the price of steel and aluminum in the U.S. because Canada and Mexico are major suppliers of those metals to the U.S. market. The U.S. also buys almost all of Canada’s oil.

U.S. automakers including General Motors and Ford Motor have spent decades planning their factory footprints around free trade between the three countries. About 16% of vehicles that will be sold in the U.S. this year will have been built in Mexico, or roughly 2.5 million cars, trucks and SUVs, according to a forecast from research firm Wards Intelligence. Vehicles manufactured in Canada will account for about 7% of U.S. sales.

Tariffs could hit the automotive supply base hard, potentially pushing up prices in the U.S. Hundreds of parts suppliers operate in Mexico, feeding both local factories and U.S. plants. Some parts cross the border several times in various stages of production before landing in a finished vehicle, said Mark Barrott, head of the automotive and mobility practice at consulting firm Plante Moran.

“Every time that would be subject to a tariff. Those costs are all likely to fall on the consumer,” he said Monday, before Trump’s posting on the planned tariffs.

If Trump carries out his tariff threat, Mexico should retaliate, leveling tariffs on U.S. corn growers, milk and pork exporters and other sectors that are among the president-elect’s most important supporters, said Ildefonso Guajardo, who served as economy minister and led Mexico’s negotiations for the creation of the USMCA. (…)

Trump has threatened Mexico with tariffs before. During his first term in office, Trump threatened Mexico with 25% tariffs if it didn’t stop thousands of migrants from crossing into the U.S. across its southern border. Then-President Andrés Manuel López Obrador deployed thousands of National Guard members to contain U.S.-bound migrants. The tariff threat was dropped.

If Mexico can limit migration and fentanyl trafficking—and discourage Chinese firms from shipping goods to the U.S. via Mexico, another Trump policy goal—then tariffs could be avoided, said Benito Berber, chief economist for the Americas at Natixis. (…)

Bloomberg:

(…) “The president-elect has done what he’s famous for, which is try to stir the debate. The only surprise is how early he’s done it,” Volpe said. “What we learned in the first term was he uses strong rhetoric, public rhetoric. But the negotiations are always tough, but reasonable — and I’m just telling everybody to be patient.”

A 25% tariff applied to all imports from Canada would put pressure on energy costs. Oil, gas and other energy products are Canada’s largest export to its southern neighbor; it’s by far the largest external supplier of crude to the US. Wilbur Ross, Trump’s former Commerce secretary, said earlier this month it would make no sense to place tariffs on Canadian energy. (…)

Currently, the re-branded trade pact, known as the United States-Mexico-Canada Agreement, allows for duty-free trade across a wide range of sectors. It’s not clear what recourse American importers, who would pay the duties, would have under the pact to head off any levy.

Beyond Bessent, Trump still has a number of top economic roles to fill in his administration. One of the chief architects of Trump’s tariff agenda, former United States Trade Representative Robert Lighthizer has yet to land a role in the second term.

November Vehicle Sales Forecast: 16.2 million SAAR, Up 5% YoY

November’s forecast SAAR of 16.2 million units is the highest since May 2021. With the month having an atypical fifth weekend, the extended timeframe means there is more upside than downside to November’s forecast – especially with retail volume already showing solid growth.

Clause-trophobia: (n) the fear that aggressive Presidential use of rarely-exploited legislative provisions will ride roughshod over democratic norms.

From Bruce Mehlman:

1. The Adjournment Clause: Article II, Section 3 of the U.S. Constitution says the President “may adjourn [Congress] to such Time as he shall think proper” if the House & Senate cannot agree on when to adjourn. When Congress is adjourned, Presidents can make recess appointments to fill jobs in the Executive Branch that otherwise require confirmation, as most modern Presidents did before Congress stopped formally adjourning (by maintaining pro forma sessions) to prevent it. Some fear the House may vote to adjourn in 2025 while the Senate declines, empowering President Trump to send them home and recess appoint whomever he wants, avoiding the increasingly time-consuming task of Senate confirmation (chart). Will the 119th Congress advise & consent or adjourn & relent? Stay tuned.

   

2. Impoundment: Title X of the Congressional Budget & Impoundment Control Act of 1974 prohibits the President from refusing to spend funds appropriated by Congress. In response to government persistently spending more than it takes in (chart from CBO), and seeking offsets for desired tax-cutting, President Trump says he will “use the president’s long-recognized Impoundment Power to squeeze the bloated federal bureaucracy for massive savings.” Can the President convince Courts to limit this Act or get Congress to modify or repeal it? Stay tuned.

3. Insurrection: The Posse Comitatus Act of 1878 bars Presidents from using the military for domestic law enforcement. The primary exception is provided by the Insurrection Act of 1792, if military forces are necessary to “suppress Insurrections and repel Invasions.” President Eisenhower invoked this exception to deploy federal troops to Little Rock Arkansas to protect students amidst school desegregation. President-elect Trump confirmed on Monday that he also intends to use the U.S. military to help with the mass deportations of undocumented immigrants, which Pew Research estimates at over 11M people (chart). Is the rising number of unauthorized immigrants an “invasion” triggering the Insurrection exception? Stay tuned.

4. Section 7511: The Pendleton Act of 1883 envisioned a professional U.S. civil service made up of experts who knew their fields, had to pass competence tests & could not be fired without due process. But the 1978 Civil Service Reform Act included a provision (now Section 7511 of Title 5 of the U.S. Code ) that stripped civil service protections for those “whose position has been determined to be of a confidential, policy-determining, policy-making or policy-advocating character.” There are 2.2M full-time federal employees (chart). Can President-elect Trump dismiss tens of thousands of career civil servants based on Section 7511, as he has vowed to do? Stay tuned.

5. Budget Reconciliation: The Congressional Budget Act of 1974 allows a bare Senate majority to overcome filibusters (chart) and pass bills that impact spending. Bills enacted using the reconciliation process include Clinton’s 1996 welfare reform; George W. Bush’s 2001 tax cuts; Obama’s 2010 Affordable Care Act, Trump’s 2017 tax cuts and Biden’s American Rescue Plan in 2021 and Inflation Reduction Act in 2022. Can President Trump & Congressional Republicans extend tax cuts & pursue other policy priorities (tariffs, immigration, permitting, border wall) using reconciliation in 2025? Stay tuned.

6. Trade After Loper Bright: While Congress delegated much trade policy authority to the Executive Branch, a 2024 Supreme Court decision (Loper Bright v. Raimondo) reduced agencies’ ability to interpret ambiguous legislation going forward. This could hinder President-elect Trump’s plans to to impose a 10–20% across-the-board tariff on imports & an additional 60% tariff on imports from China to deal with persistent U.S. trade deficits (chart). Will President Trump’s sweeping tariff plans pass legal muster or require new enabling legislation? Stay tuned.

Trump’s deportation dilemma (Axios)

It’s one thing to call for the largest deportation in American history. It’s another to pull it off logistically, given the highly complex process of spotting, detaining, holding and evicting people in the U.S. illegally.

The judicial process — one small piece of a long, expensive deportation machinery — illustrates vividly the complexity ahead.

The U.S. immigration system’s backlog of 3.7 million court cases will take four years to resolve at the current pace. But that could balloon to 16 years under President-elect Trump’s mass deportation plan, Axios’ Russell Contreras reports.

Without a huge increase in immigration judges, millions of new cases would flood the non-criminal system. Trump’s administration likely would need new detention centers nationwide to hold people suspected of being in the U.S. without authorization — possibly for years.

Immigration experts estimate the whole operation could cost taxpayers $150 billion to $350 billion.

Immigration courts closed 900,000 cases from Oct. 1, 2023, to Sept. 30, 2024, according to data from the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

• That’s the most cleared cases in a fiscal year, and 235,000 more than the previous year, TRAC reports.
• At that pace, immigration courts wouldn’t clear all of the active cases until 2028, an Axios analysis of TRAC data found.

Add 11 million undocumented immigrants — who Trump said would be part of his mass deportation plan — and the backlog would go into 2040 at the current pace, according to an Axios review.

That’s not counting millions of other migrants trying to enter the U.S. in the future.

Tom Homan, just over 12 hours before he was named Trump’s border czar, told Maria Bartiromo on Fox News’ “Sunday Morning Futures” that the administration will “concentrate on the public safety threats and the national security threats first, because they’re the worst of the worst. So it’s going to be the worst first.”

“That’s how it has to be done,” Homan added. “And we know a record number of people on the terrorist watch list have crossed this border. We know a record number of terrorists have been released in this country.

“We have already arrested some planning attacks. So, look: The president is dead on when he says criminal threats, national security threats are going to be prioritized, and that’s the way it’s going to be.”

EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated podcast on the day’s post courtesy of Google’s NotebookLM): November 25, 2024

U.S. Flash PMI

Output growth accelerates as business mood brightens and inflation cools

The headline S&P Global Flash US PMI Composite Output Index rose to 55.3 in November, up from 54.1 in October, signalling the fastest expansion of business activity since April 2022. Higher activity reflected rising demand, with new orders picking up sharply to register the strongest upturn in business inflows since May 2022. Growth remained very uneven across the economy, however, with a surge in service sector activity contrasting with a further downturn in manufacturing. While service sector output rose in November at the fastest rate since March 2022, manufacturing output fell at a rate not seen since December 2022. The resulting divergence in output was the widest recorded since data were first available in 2009 barring only May 2021, amid the re-opening of the economy from pandemic restrictions. Similarly, while new orders for services rose at a rate not witnessed since April 2022, new orders placed at factories fell for a fifth straight month, albeit registering the smallest decline seen over this period to hint at the production downturn potentially moderating in December. Looking further ahead, having slumped to a 23-month low in September, optimism about output in the coming year recovered for a second successive month in November, reaching the highest since May 2022. The improvement in sentiment was broad based, but was especially notable in the manufacturing sector, where optimism struck a 31-month high, adding to suggestions that the economic expansion may become more even in the coming months. Improved prospects reflected the clearing of political uncertainty following the US Presidential Election, according to anecdotal evidence provided by survey respondents, accompanied by expectations of lower interest rates, lower inflation and improved economic conditions. Respondents also often cited a more business friendly incoming administration as beneficial to the outlook, notably in terms of looser regulation and protection measures, the latter helping boost sentiment particularly in manufacturing. Despite the upturn in business confidence about the year ahead, companies reduced employment for a fourth straight month in November, with job losses hitting a three-month high. A steepening rate of payroll reduction in the services economy was partly offset, however, by a rise in manufacturing jobs for the first time in four months. Average prices charged for goods and services meanwhile rose only very modestly in November, the rate of inflation cooling to the lowest since prices began rising in June 2020. The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially marked moderation of inflation seen in the services economy, where charges rose only marginally and at the slowest rate since May 2020. Manufacturing selling prices rose at a slightly increased rate. Input cost inflation also slowed, though remained somewhat elevated by historical standards, notably in the service sector amid higher wage pressures. However, the overall rate of input cost inflation was the lowest since June. The S&P Global Flash US Manufacturing PMI rose from 48.5 in October to 48.8 in November, signaling a deterioration in business conditions within the goods-producing sector for a fifth successive month but with the rate of deterioration moderating to the slowest since July. Although production fell at a sharply increased rate, all other PMI components moved higher. The rate of loss of new orders eased and employment rose – albeit modestly – for the first time in four months. Inventories meanwhile fell at a reduced rate and suppliers’ delivery times lengthened to the greatest extent for 25 months, which acted as an additional boost to the headline PMI. Longer delivery times were often linked to increased purchasing of inputs ahead of potential tariffs on imported inputs. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: (…) “The rise in the headline flash PMI indicates that economic growth is accelerating in the fourth quarter, while at the same time inflationary pressures are cooling. The survey’s price gauge covering goods and services signalled only a marginal increase in prices in November, pointing to consumer inflation running well below the Fed’s 2% target. (…) “Factories are meanwhile stepping up their purchases of imported inputs as they seek to front-run tariffs, putting pressure on supply chains to a degree not seen for over two years. Any further stretching of these supply lines could see prices move higher as demand outstrips supply.”

Remarkably, the mainstream media did not carry this important flash PMI release with data collected November 12-21, after the U.S. elections.

Consider:

• The Composite Index jumped 1.2 points to reach 55.3, a 31-month high and its highest reading since July 2018 when the manufacturing PMI was very strong.
• This without a positive contribution from manufacturing (48.8).
• Total new orders rose “sharply to register the strongest upturn in business inflows since May 2022” even though manufacturing new orders declined again but at a much slower rate.
• Manufacturers’ “optimism struck a 31-month high”, leading them to increase employment for the first time in four months.
• Service employment declined amid booming demand. Productivity must be rising strongly.
• “The overall rate of input cost inflation was the lowest since June.”
• Selling prices “rose only very modestly in November. (…) The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially marked moderation of inflation seen in the services economy, where charges rose only marginally.”

What’s the opposite of stagflation?

Total business output has risen to well above pre-pandemic levels even though manufacturing output has gone nowhere:

On November 18, I wrote this WHAT IF section:

What if this buoyant consumer, nearly 70% of GDP, coupled with recent and coming policies, triggers a U.S. manufacturing revival boosting its contribution above its current 10-11% of GDP?

Manufacturing employment is down 0.5% since the end of 2022 while total employment is up 3.2%. Had manufacturing employment kept pace, the U.S. would have more than 450k additional workers earning good salaries.

According to the Alliance for Automotive Innovation, the automotive ecosystem drives $1 trillion into the U.S. economy each year, about 3.7% of GDP. “Every direct job in vehicle manufacturing supports 10.5 additional American jobs and every $1 spent in vehicle manufacturing creates additional $3.45 in economic value.”

Manufacturing production (black) has been flat since 2012 and is 7.5% lower than in 2007. That’s almost than 2 lost decades.

What if vehicle demand and production start to contribute to growth?

• The average age of light weight vehicles in the U.S. is now 12.6 years. It accelerated sharply during the pandemic as availability declined and prices skyrocketed.

• New vehicle affordability is improving. U.S. households needed 37.4 weeks of income to purchase the average new car in June. Still, vehicle affordability remains markedly down compared to 2019, with prices and interest rates much higher than they were before the pandemic. The typical monthly payment is peaking at $743.

COX AUTOMOTIVE/MOODY’S ANALYTICS VEHICLE AFFORDABILITY INDEX
JUNE 2024

Weeks of Income Needed to Purchase a New Light Vehicle

• Car prices have stalled while labor income keeps rising thanks to steady employment and solid real wage gains. Interest rates are also declining. Affordability could improve meaningfully in 2025.

• Since the pandemic, manufacturers managed their margins installing scarce parts on the more profitable SUVs and light trucks. Sales of less expensive sedans declined to the point where the average age of regular cars shot up to 14 years.
• According to Hedges & Company, about 23% of all light vehicles on the road today are 20 years old or older. That’s 66M vehicles! Another 57M are 15-19 years old. Total: 123M cars are more than 15 years old. Hedges and Co. informs us that “the nation with the oldest average age of vehicles in the world is Bolivia, where vehicles are an average of 18.8 years old. The nation in the European Union with the oldest passenger cars is Greece, at 17.3 years.”
• Production seems to be accelerating as supply issues are now largely behind us. Wards Intelligence: “In a reversal of recent trends there was an increase in North America production to the current-quarter outlook in the Wards Intelligence North America Production Tracker, and output in the most recent month [September] finished above expectations.”
• Sales have not increased much yet but rising available inventories will draw more buyers off the sidelines.
• Actually, retail sales of motor vehicle and parts dealers jumped 1.6% MoM in October while prices declined 0.2%. Wards says that “Demand in the retail sector accelerated more than expected at the end of the month, putting October’s final raw volume roughly 15,000 units above the forecast.”

The stage seems set for stronger light vehicle sales and production in 2025, fueling the one third of the U.S. manufacturing industry that’s been essentially idle since 2019.

WHAT IF #2:

What if housing also begins to contribute to GDP growth?

Total housing starts averaged about 1.56M units annually between 1983 and 2007. Following the Great Financial Crisis, only 1.15M units per year were built on average for a total of 17.25M units while the number of households grew 18% or 20.3M.

Estimates of the actual U.S. housing shortage vary but shortage there is. Freddy Mac says 2.5M units are needed to make up the shortage.

Since the pandemic, “plans to buy a home” stand at an all-time high, significantly above all measures since the 1980s. Affordability is the perceived problem as Ed Yardeni illustrates:

But affordability is no worse than during the 1980s when starts averaged 1.65M units. Between 1983 and 1989, 30-year mortgage rates averaged 11.5% and rarely dipped below 10%.

This time around, mortgage rates are below 6.7% potentially en route to the 6% range if inflation retreats to 2%. The real problem is house prices 20% above rents and wages.

Freddie Mac shows the spread between the median rent and mortgage payments since 2000 when starts were still in the 1.6M range:

The main takeaway is that while the current percentage difference is high, it is down from when mortgage rates peaked last October and well below the peak in 2006 of 50%. It is also not much higher now than during the early 2000s. We find that even though now is a relatively expensive time to buy compared to renting, it has been far worse. (…)

It is also possible that the perceived advantage of homeownership may be higher than in the past due to rapid rent increases in recent years. After all, a fixed-rate mortgage is a great inflation hedge in that only the taxes and insurance costs increase over time while the principal and interest components of the mortgage payment don’t increase over the life of the loan.

In other words, some components of your mortgage payment can remain constant in the future (or decline if you refinance at a lower rate) as your income (hopefully) increases and inflation pushes up rents. (…)

Given the size of the home is an important variable in a homebuyers decision as it relates to affordability, we investigate the percentage of applicants who intend to buy a larger home. We do that by comparing the size of the rental to the size of the intended purchase in square feet. Exhibit 4 presents the percentage of applicants living in single-family rentals that applied to buy larger home.

The percentage of loan applications to purchase homes with more square footage than their rental house trended down from a high of 71% in 2013, when home prices had overcorrected to the downside during the [2005-07] housing crash, to 64% in September 2024. The chart shows a slight temporary reversal in the downward trend in 2020 as working from home became more common, before falling again as mortgage rates increased.

We suspect the downward trend was driven by worsening affordability, which has forced more prospective homebuyers to settle for smaller homes as compared to in the past. (…)

The above analysis focuses on people planning to move from a single-family rental to their own home. There is also a similar decline in the share of applicants from existing homeowners applying for larger homes in recent years from 69% near the start of the pandemic to 65% now.

• John Burns Research:

Intergenerational wealth transfer is enabling more young adults to enter the housing market. The generations born in the 1940s through the 1960s have a remarkable net worth and are giving their kids and grandkids some much-needed help.

In fact, our survey shows that 42% of Gen Z homeowners and 40% of renters receive financial help from family, covering expenses from utilities to mortgages.

One developer client told us that they had to expand their offering of single-family detached homes to meet demand from millennials—not because they can afford homes on their own, but because many are receiving financial support from parents and grandparents.

But this relationship isn’t one-sided. While the kids may benefit financially, the parents benefit socially by being closer to family. This trend also reflects the growing social desire of the newest crop of the 55+ population (those born in the 1960s) to live closer to family, showing how societal values can shape housing demand.

BTW: What 50+ years of history reveals about housing when the Fed lowers rates

We found that history does, in fact, rhyme for housing. In most cases, the single-family industry expanded 12 months after the first Fed rate cut—even in “hard landings,” when a recession coincided with falling rates. The chart below shows the change in single-family housing starts 12 months after the start of each Fed rate-cut cycle since 1970:

• Excluding the global financial crisis starting in 2007, single-family housing starts grew by an average of 12% one year after the first interest rate cut.
• In the two examples of “soft landings” (1984 and 1995), when the Fed began lowering interest rates without a recession, single-family housing starts fell a modest 1% and grew by 9%, respectively, within 12 months of the first rate cut. 

So, what if younger YOLO-minded Americans, helped by their parents, decide to quit their high and ever inflating rental and bite the house price bullet, locking in 5-6% mortgage rates for 30 years knowing their rising income will eventually erase the current house/rent gap while building some housing wealth themselves.

Strong dollar set to hit emerging market bonds, warn investors EM debt funds suffer outflows as hopes of rate cuts by developing nations fade

• Strong economy
• Stable to higher interest rates
• Tax cuts
• Tariffs

Higher US rates would make investing in riskier markets abroad relatively less attractive compared with the US, pushing their central banks to increase their own rates to draw in capital.

AI CORNER

U.S. natural gas producers chase AI-driven surge in power demand to weather low prices

Shale gas producers in the U.S. Permian Basin are sounding out data-center operators building up capacity to power a boom in AI applications, aiming to ease the pressure from a nearly two-year slump in the prices of the commodity.

Devon Energy, Expand Energy, Diamondback Energy, and Permian Resources have highlighted the potential for AI and data centres to drive gas demand and said they were in initial discussions with many operators.

U.S. data centres’ energy needs could boost gas demand by between 3 billion and 6 billion cubic feet per day (bcfd), according to S&P Global Ratings estimates. The agency expects U.S. data centre power demand to increase 12 per cent annually until the end of 2030. (…)

Constraints on data centre expansion in Texas due to the electricity grid’s limitations may pave the way for tripartite agreements involving operators, utilities, and data centre developers, analysts told Reuters.

“That is the most likely path that we (will) travel down … I don’t think a lot of the operators are willing to put the capital down to build power plants,” said Carson Kearl of energy researcher Enverus.

Operators willing to develop any kind of carbon capture and storage (CCS) operation around the gas-fired power plants, specifically in Louisiana and Texas, may gain an edge with publicly traded hyperscalers, Kearl noted.

“The combination of natural gas and carbon capture provides a winning formula that will help fuel the continued growth in AI, data centre build-outs,” said BKV Corp Chief Operating Officer Eric Jacobsen.

Many hyperscalers, including tech giants Amazon, Microsoft, and Alphabet’s Google unit have pledged to achieve net-zero carbon emissions and are thus keen to reduce their data centres’ carbon footprints. (…)

• Need to Add Three NYCs to the US Power Grid by 2030 

The power need for the largest hyperscale data centers is currently 1 GW, and estimates show that 18 GW of additional power capacity will be needed to service US data centers by 2030. For comparison, the total power demand for New York City is currently around 6 GW. In other words, there is a need to add three NYCs to the US power grid by 2030.

Apollo

See also Power Play.

EARNINGS WATCH

From LSEG IBES:

475 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.4% reported earnings above analyst expectations and 18.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of  ompanies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 7.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.

Of these companies, 60.6% reported revenue above analyst expectations and 39.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenues that are 1.5% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.

The estimated earnings growth rate for the S&P 500 for 24Q3 is 8.9%. If the energy sector is excluded, the growth rate improves to 11.7%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 5.3%. If the energy sector is excluded, the growth rate improves to 6.4%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 9.9%. If the energy sector is excluded, the growth rate improves to 12.6%.

With 95% of the S&P 500 companies in:

• S&P 500 earnings ex-Energy:  +11.7%. Q4e: +12.6%
• IT + Communication Services: +21.0%. Q4e: +17.4%
• S&P 500 ex-IT/CS/E:                   +7.2%.  Q4e:  +9.8%

Trailing EPS are now $237.37 (+8.4% YoY). Full year 2024: $243.81 (+10.1%). Forward EPS: $263.38 (+11.7%). Full year 2025: $274.79 (+12.7%).

Guidance for Q4 is not great:

But analysts don’t mind, do they?

Maybe they are reacting to the shocking +7.6% surprise factor in Q3. But three months ago, guidance for Q3 was much more positive:

Goldman Sachs’ tally of consensus bottom up estimates shows little change in total S&P 500 earnings estimates but a reshuffling among sectors. The faster growers of 2024 are generally seeing rising estimates for 2025. Note the rather sharp drops in estimates for Industrials.

SENTIMENT WATCH

The economic outlook is seen improving:

Higher interest rates never really hurt:

• US Households Have Never Been More Bullish on Equities The Conference Board asks US households about their outlook for the stock market, and a record high of 51.4% say that stock prices will move higher, see chart below.

Getting too sentimental?

Via Callum Thomas:

• Single Stock Leveraged ETFs:  Yes, this is a thing. At first I thought: “man, this is a weird and dumb thing”. But then I got to thinking, if the index is dominated by big tech, and if big tech is dominated by a handful of names, then some might argue why bother buying the index if you can just buy the top stock(s)? And this is apparently what some people are doing, and with extra leverage… and by the way, yes: you can buy options on these leveraged ETFs, so you can get leverage on your leverage (and if you used debt to buy those options well, you’d be leveraging your leverage on your leverage… *not financial advice!!!!*).

Source:  @Todd_Sohn

• Demand and *Supply*:  In the long-run, what drives stock prices is earnings. In the short-run it’s demand and supply. And interestingly, equity market supply has been much lower than usual (one pillar of support to the cyclical bull).

Source:  @neilksethi

• How much cash is really on the sidelines?

Since 2019, cash levels have risen by a notable 38%, but household stock holdings have surged by 50%, causing the share of cash in portfolios to decline slightly. This means that while cash has grown, households have shifted even more aggressively into equities, underscoring their appetite for risk. As a result, cash allocations are below long-term average levels while stock allocations are at all-time highs.

This indicates that households are not, in fact, retreating into cash but are actively participating in equity markets with historically high exposures. And it’s not just individual investors. According to Bank of America’s global fund manager survey (Oct. 15, 2024), the cash levels of institutional money managers fell to such a low level (below 4%) that it triggered the firm’s contrarian equity market “sell” signal as recently as October.

The cash-on-the-sidelines narrative also doesn’t consider that, in recent years, cash has been an attractive alternative to bonds. For over two years, the inversion of the yield curve has meant that investors can earn more sitting in cash than they can going farther out on the curve in bonds (Chart 5). Meanwhile, after the 46% drawdown in long-term Treasuries that occurred between 2020-2023, coupled with ongoing concerns regarding government deficits and inflation, investors may be content to hold more cash (and cash equivalents) than traditional bonds for some time.

• Mutually Assured Exposure:  The trend and the cycle is interesting in this chart — Mutual Funds in aggregate are holding much lower cash allocations than usual; both from a cyclical standpoint (lower than previous lows, lower than trend —as well as on a trend basis (clear downtrend, big shift from the 1950’s-90’s). This reflects a combination of market movements, FOMO/peer-risk/client-demand, and lower interest rates.

Source:  @elliottwaveintl

• Here’s one with more cash than usual. For Mr. Buffett, cash is not an asset class, it simply builds up because sales are not replaced by new buying ideas, the mark of a value investor.