The Marshall Plan was 5% of US GDP, and the US fiscal response to Covid was 20% of US GDP, see chart below.
The US Fiscal Response to Covid was Four Times Bigger than the Marshall Plan
Strong S&P 500 Earnings Expectations
Equity analysts continue to increase their earnings expectations for the S&P 500, see chart below.
There are simply no signs of a slowdown in corporate earnings. The economy continues to power ahead fueled by easy financial conditions, and this is an upside risk to inflation over the coming months.
Inflation Scenarios
Month-over-month inflation has been rising on average 0.4% for the past three months and 0.3% for the past six months.
If inflation continues to rise at this pace for the rest of the year, then year-over-year core CPI inflation will increase from currently 3.8% to 4% to 4.5%, see chart below.
Even if month-over-month increases in core CPI comes in at the historical average of 0.2% for the rest of the year, then year-over-year inflation will still end the year at 3%.
To get inflation back to the Fed’s 2% inflation target, core CPI for the rest of the year will have to come in at an unprecedented 0.1% month over month.
The bottom line is that base effects and strong recent readings complicate the Fed’s efforts to get inflation back to its 2% inflation target. Put differently, it will require a sharp, immediate slowdown in consumer spending and capex spending for the Fed to be able to cut rates by the end of this year.
Many More Private Firms in the US
In financial markets, a lot of conversations are about public companies, but the reality is that in the US, 87% of firms with revenue greater than $100 million are private, see chart below.
Rates Higher for Longer than Normal
It normally takes eight months from the last Fed hike until the central bank starts cutting. But during this cycle, the Fed has kept interest rates constant for ten months since the last hike in July 2023, see chart below. With easy financial conditions still giving a significant boost to inflation and growth over the coming quarters, the risks are rising that we could see a Fed cycle that is very different, with the Fed keeping rates higher for much longer than we usually see.
Younger Households Have Lower FICO Scores
Younger households tend to have lower credit scores, and the consequence is that Fed hikes and associated tighter credit conditions tend to have a more negative impact on younger generations, see chart below.
Gold Price Rising
The price of gold has been rising in recent months on the back of geopolitical tensions, central banks including China stepping up purchases of gold, and expectations of lower rates triggering a rise in inflation after the December Fed pivot.
Capital Markets Reopening After the Fed Pivot
For two years, the Fed was saying, “Interest rates are going higher.”
That message resulted in very little activity in capital markets, with low levels of IPO, M&A, sponsor-to-sponsor deals, or sponsor-to-strategic deals.
This changed at the December 2023 meeting when the Fed said, “Interest rates are now going lower.”
The impact of this signal change from the FOMC was profound. It triggered a significant rally in the S&P 500 and in IG, HY, and loans. As a result, capital markets reopened and LBO financings have rebounded significantly since December, see chart below.
With the Fed still saying that the next move in rates is lower, we should expect the rebound to continue.
The US Is the Biggest Oil Producer in the World
The US now produces more oil than Saudi Arabia and Russia, see chart below.
Ownership of Government Bonds Across Countries
The US has a relatively high share of domestic ownership of government bonds relative to European countries, see chart below.
