Let me start by announcing a few changes.  Providing these market and economic updates on a quarterly basis is just not frequent enough.  Yes, we do “Flash Reports” when a major event happens and still will.  So, starting now, we will do 6 reports a year, every other month.  Plus, we are exploring a monthly blog with a partner.  Anything that we can do to make sure you, our clients, understand our thoughts on the market and all the “pieces” that go into our thought process.

 

To start off, we continue to believe our 1-1-25 statement that the S&P 500 should reach 6400 this year.  This is based on the S&P 500 having an earnings of close to $300 – which will be a P/E Ratio of 21 by year-end.  With corporate earnings growth of approximately 10-12%, a 21 P/E is quite reasonable.  Soon, believe it or not, we will be focusing on 2026 earnings of $350.  Hold on here, but those earnings and a 21 P/E put the year-end value at 7350 for the S&P 500.  That’s not a “prediction” but it helps you understand why we have more of a “risk-on” versus a “risk-off” scenario.

 

I would like to take a moment while we are on the “risk” topic, to show risk (i.e., volatility) in a visual.  See the chart below from Franklin Templeton.

CHART 1

As a long-term investor, this is why I “like risk.”  It’s because you are rewarded for it!  Yes, the average is annual growth of 10.7%.  But note that when the market is down (21 times) it is down less than 12% for 15 out of 21 times!  It’s those other 6 years (which appear to come out of nowhere!) that makes diversification so important.  And if you diversify properly, it really smooths out the ride.  See the table below and look at the white blocks (asset allocation).  Note:  Never in the bottom 3 and just once in the top 3… smoother ride.

CHART 2

The problem is that the average investor tends to be susceptible to “panic” (but then, aren’t we all).  But by not diversifying, and trying to “time the market,” those investors tend to underperform money markets.  Fact – from 2004 to 2024, the stock market averaged 9.7%.  The average investor made 3.4%! ‘Nuff said.

 

Next, let me address the whole tariff/inflation question.  So misunderstood.  I imagine many of you have been told by the media that tariffs will make inflation explode.  That was the primary reason for the market meltdown in March and April.  Note – such corrections are normal.  See the chart below, which we refer to as the “measles” chart. 

CHART 3

Note as of this year we have already had a 19% correction (from high of 4 to low of minus 15).  As you can see, the “average correction” is 14.1%.  The market really thought that inflation was here in a big way.  But what happened?  CPI was just released and it’s at a monthly change of 0.1%!  That’s now at 2.4% annually.  PCE inflation (the Feds favorite) is running at 2.1%.  So, talks of stagflation need to be put on the back burner for the near future.

 

While on the topic of inflation and tariffs, humor me as I “nerd out” a bit.  Tariffs get too much attention when it comes to inflation.  It’s true that certain products may rise with tariffs, but this means there will be less $ to buy other goods and services and hence their price will fall.  As Brian Westbury from First Trust says, “Tariffs shuffle the deck chairs on the inflation ship, not how high or low the ship sits in the water. That’s up to the money supply.”  So, the level of the ship in the water, or the level of inflation, is determined by the M2(or money supply).  More money in the system is the same as more water… the boat AND inflation go up.  And M2 has been quite well contained.  And if you are worried about tariffs from China, you should note that prices in China are falling – rather dramatically.  See the attached chart below.

CHART 4

Chinese import prices are falling.  In other words, China is importing deflation to the U.S.  If you add this, plus an oversupply of energy worldwide, you have a recipe for stable inflation.  With stable inflation and slowing labor force growth, we envision that the Fed could reduce interest rates once and possible twice this year.  September looks like the first date, as of now.

 

So, in the near future, it appears the path of least resistance is up.  A slow, gradual ascent would be preferred.  Look for a second quarter GDP number of 3.5%... or higher.  Don’t read too much into that, more of a correction from 1st quarters -0.2%.  Also, look for more M&A activity, A.I. talk and implementation, productivity increases, etc.  It’s not all good though.  Obviously, international tensions that could get out of hand.  Plus, unemployment is slowly losing its strength.  Manufacturing has stabilized but is still at a weak level.  And the bullish/bearish consensus has gone from oversold to neutral.  Polymarkets have a chance of recession down to 25% (was 66% in early May).  Looks like much of Wall Street has gone on their summer vacation.  Maybe we should join them!!!

 

Happy 4th of July!

- John Osborn, PhD, CFP®, CFS, ChFC, BCS, AIF

Quote of the Day:

“I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline powered turtleneck sweater. And, of course, I bought some dumb stuff too.” – Steve Martin

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Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss.  These are the opinions of John W. Osborn and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.