DG

On @CNBC yesterday, I reaffirmed my belief in the S&P continuing to melt up till Thanksgiving. Mkt optimism on three Fed rate cuts this yr starting in September are the main culprit, especially after better than feared inflation data this morning. Other signs/fuel for irrational exuberance building include: 1. Meme stocks are back- eg $AEO 2. Hot IPOs are back- eg $FIG 3. Bitcoin surged back above $120K 4. Blank-check companies are back, 5. Every tariff deal done now set at 15-20% rates is being taken as positive 6. the OBBB has tax benefits for future R&D and capex investment in AI As was seen as recently as 2021 when the Fed ignored rising inflation or the late 1990s during the internet buildout when the Fed was worried about the Y2K bug, easy money is a powerful drug for the markets. The Jackson Hole meeting of central bankers starting August 21st is likely to set the stage for upcoming rate cuts. However, my belief in a 10-20% market correction starting near Thanksgiving have not changed. I believe that demand has been pulled forward as seen by imports increasing 38% y/y in Q1 due to fears of tariff driven price increases later this year. This is likely to result in lower than expected demand over the holiday period. For right now, I am positioned for the market rally to continue and will worry about a market correction later and signs that the market is sobering up.

I remain bullish currently and today the S&P remains up slightly intra-day and near 52 week highs despite tariff threats on a slew of nations over the weekend. This was certainly not the reaction to ramped up tariff rhetoric through early April of this year. I pay attention to the reaction to the data more so than the actual data for my near-term views while the actual data shapes my longer-term views. This reaction today tells me there is probably still more upside with 1) a near record ~$7.1 trillion in money market funds up 15% y/y providing more buying power and 2) expectations of Fed rate cuts supporting high market multiples. In addition, upcoming Q2 earnings should be solid. This is driven by: 1) due to the tariff turmoil, conservative guidance was given by companies during Q1 earnings that sets a low bar for upcoming Q2 results, 2) the 7% drop in the US dollar in Q2 from Q1 helps the ~40% of revenues in the S&P that are international, and 3) there seems to be some continuing pull forward in demand in front of the price increases later this year due to tariffs. Longer-term, I continue to believe there could be a 10-20% drop in the markets later this year as we approach Thanksgiving. This is due to the pull forward in demand occurring (imports up 38% y/y in Q1) hurting demand during the holidays and high PE levels at 24x CY25. But there is a cost to being too early (or too late.) I remain bullish near-term but am prepared to react as the market reaction to data changes. Right now the glass is half full. As Charles Darwin said, “It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change.”