The most notable gainer in last week’s Trump Bump 2.0 was the Russell 2000. That index’s weekly surge of +8.6% was its best since the wild pandemic gyrations of April 2020. Yet, this latest Trump-associated upswing fell short of the Russell 2000’s election-week return of +10.2% in 2016 when Trump was the clear underdog.

In October, we published a new election barometer using the DJIA to predict the winner. It failed! Interestingly, the last time this model did not correctly pick the winner was also a year in which the sitting president, who was eligible to run, declined to do so—in 1968.

We’d expect monthly jobs numbers to confirm a recession, not forecast one. This cycle, though, employment reports have been warning of a downturn for 2½ years. It would be easy to call them misfires, but red flags keep coming. If a soft landing was in store, the jobs numbers should have improved by now. 

Given the beginning of an easing cycle in September and the Trump Trade in October, the lack of steepening in the yield curve is intriguing. While tighter financial conditions are likely a challenge to the steepening move, policy regimes and the term premium are favorable toward further curve steepening.

Based on leading economic indicators, a case could be made for the Fed to cut rates again. Stocks are telling another story: Based on market momentum and valuation, an impending rate cut might be the least justified one in modern history.

Last year ended with an extremely rare nine-week winning streak, and the S&P 500 is still charting extraordinary upside momentum more than 10 months later. Historically, after a one-year stock surge of this magnitude (>35%), the U.S. has never declined into recession over the next 12 months.

Despite outperformance of value and small-cap stocks, actively-managed value and small-cap portfolios both struggled. No style box managed a clear win in favor of active management, which is unusual for such leadership conditions. There are several explanations that can account for this behavior.

With the closely intertwined businesses of semiconductors and semiconductor equipment, it is not surprising that the two industries have historically performed similarly. Yet, in 2024, a colossal disconnect has emerged, with semi-equipment stocks up a paltry 5%, miles behind the booming semiconductors.

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The S&P 500’s estimated bottom-up operating EPS shrank 2% during the first month of Q3 reporting (Chart 1). A similar, slightly larger drop in the EPS estimate was experienced in July, as results were tallied for Q2’s first month of reporting. That initial Q2 deficit was recouped over the next two months and actual results eventually ended higher than what was projected at the beginning of earnings season. To maintain this year’s strong earnings streak, where results match estimates (not common), we’ll need another “spring-back” scenario at the back end of Q3.

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It’s been awhile since readers have looked to The Leuthold Group for a rosier take on the stock market than what they can get from Wall Street. But there’s a time and place for everything.

Some were unnerved this week to hear the usually cheery strategist of a major U.S. investment bank predict S&P 500 total returns for the next decade of just +3% per year. While depressing, our work does not find that forecast out of line. We estimate that if S&P 500 5-Yr. Normalized EPS grow at their 1957-to-date annualized rate of +6.3% for the next ten years, and the P/E multiple on those future EPS were to revert to its median level for the same time period (19.4x versus today’s 31.6x), the S&P 500’s annualized total return out to late 2034 would be +2.6%.

The relative performance of small caps lags the S&P 500 by 75% since 2018, and we wondered why.  Was the Magnificent 7 effect so exaggerated that Info Tech and Communication Services, the sectors at the epicenter of the mega-cap growth boom, created such an overwhelmingly high hurdle that small caps were not able to keep pace with these powerhouse companies?  Alternatively, has small cap weakness been the product of sluggish results across multiple sectors, irrespective of the mega-cap growth issue, such that large caps were superior no matter which direction you looked? We label these two hypotheses as “deep” (relating specifically to the narrow but intense Mag 7 effect in Info Tech and Comm Services) or “wide” (describing failings across most small cap companies and industries) and designed this study to identify the most likely explanation.

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We take a historical look at potential implications of the market’s strong upside momentum for both the stock market and the economy.

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The latest CPI report was a tad higher than consensus. Our scorecard shows the trend of disinflation stays intact.

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Due to a falloff in our sector rankings, exposure to IT in our equity portfolio has dropped sharply over the past year. Elevated valuations, combined with poor relative strength, overbought signals, and slowing growth are the primary impetus for the declining scores.

Market reaction to the latest flood of monetary and fiscal stimuli has been spectacular. While conviction about Beijing’s attempts to revive its flagging economy has been severely lacking, this time we should believe it. It’s certainly the right medicine China needs and the spark of confidence these actions will ignite should not be underestimated.