Economic Resilience, Profits, And Flows ‘Trump’ Administration Noise
There’s no shortage of noise-worthy headlines I could reference to kick off this week’s missive, but let’s start with equity markets and then see where that takes us. Most of the major averages closed out last week at fresh all-time highs, with the S&P 500 gaining +1.6%, the Nasdaq adding +1.9%, the Dow appreciating +2.3%, and the Small Cap Russell 2000 index surging +4.6%.
Momentum, sentiment, and the technical picture are all constructive for stocks, with 74% of the S&P 500 now trading above their 50-day trendlines. The NYSE cumulative daily breadth chart shows signs of a breakout after rising over the past two weeks, with winning stocks in the opening week of the year smashing losers by an impressive 3-to-1 margin.
What’s also interesting about the early performance scorecard of 2026 is the outperformance of foreign equity markets relative to the S&P, even in the face of a US dollar that is up for the year. The same goes for the sector breakdown within the S&P 500, where Materials (+6%), Industrials (+4%), and Energy (+4%) are leading the charge, while Technology (+1.5%) and Communication Services (+0.2%) lag. Another constructive signpost early in the year is how well the riskier parts of the credit markets are performing. High-yield corporate bond spreads remain near cycle lows, reflecting optimism about the health of the U.S. economy. Unlike equities, this market is naturally skewed to risk-averse thinking. The best one can do while holding a high-yield bond is to receive one’s coupons and principal as promised, after all.
All in all, the setup to kick off 2026 with global equities, small caps, and cyclical sectors performing well while high yield credit exhibits little to no stress, is as good of a start as the bulls could ask for. It’s early days yet, so investors shouldn’t count their chickens before they hatch, but a strong opening to the year (especially with the backdrop of dollar strength) sure beats a sloppy one. I’ll get to some skeptical thoughts a little later in the missive, but for now, outside of elevated sentiment and positioning data in the bull camp, there is not much on my radar flashing warning signals.
Now let’s move on to some of the noise (news) making its way through the headlines over the past week as it relates to this administration’s incursion into private markets. But before we get there, humor me as I present a bit of a precursor on not missing the forest for the trees.
While I think it’s important for investors to always retain some level of skepticism and never abandon risk management, it’s apparent that so far (12 months into Trump’s second term) the unorthodox methods of this administration are a sideshow to the more powerful forces driving capital markets: earnings, profit margins, economic resiliency, inflation, interest rates, liquidity, and capital flows. While not all these variables are in perfect harmony at the moment, the majority are acting as a subtle tailwind. And in the absence of a material shock, the general trend in markets is likely to continue on the path it's been on. Earnings and profit margins remain important supports (justification) for elevated valuations in U.S. equities, where Goldman Sachs put out a thorough report over the weekend arguing why it's been so painful to be a long-term bear on equity markets.
Below is a chart plotting the long-term growth rate in S&P 500 earnings per share. Sure, there are some periods where the blue line tanks (recessions), but the long-term trend (red dotted line) of nearly 7% EPS growth is unmistakable.
Supporting the long-term growth trend in EPS has been a sustained expansion in profit margins over the past two decades. This is one of the most compelling rationalizations for why S&P 500 valuations are not excessive at 22x forward earnings relative to a historical average of closer to 16x. If profit margins are sustainably higher by 50 – 75% than they had been in the past, then it stands to reason that investors would be willing to pay more for said earnings.
Don’t get me wrong – I’m not saying what Trump or this administration does doesn’t matter to markets. It does. But it's not nearly as important as the Trump loathers or Trump disciples make it out to be. There are a lot of other powerful forces already structurally at play that remain in motion regardless of the latest Truth Social Post or Executive Order that has no teeth behind it, other than a powerful man in a powerful position ‘talking aloud’. Take Exxon’s CEO Darren Woods comments to the President last Friday, while in attendance at a gathering of oil executives at the White House, where Trump was pushing for a $100 billion investment to rebuild Venezuela’s oil industry.
"If we look at the legal and commercial constructs and frameworks in place today in Venezuela, today it's uninvestable."
"We've had our assets seized there twice, and so you can imagine to re-enter a third time would require some pretty significant changes from what we've historically seen here."
Woods went on to detail some conditions on what it would take to move forward on a plan to risk capital in the region again: “durable investment protections, reformed hydrocarbons law, and a stabilized legal system to protect foreign assets”. That all sounds reasonable in light of Exxon’s prior experience, but not what President Trump wanted to hear:
"I didn't like Exxon's response. I'll probably be inclined to keep Exxon out... They're playing too cute."
My intent with calling attention to this meeting and comments by two very powerful individuals isn’t to showcase Exxon CEO’s insubordination (how dare he not fall in line and be a team player) or take a stab at the President’s ego (I’m going take my ball and go home), but rather to illustrate the outside structural influences that inevitably come to the surface between President Trump wanting things to be a certain way and the numerous constraints that must be overcome before it can become a reality.
Last week, President Trump stated that he is limited in power only by his own morality. That view is being tested once again with this bizarre DOJ move to serve the Federal Reserve with grand jury subpoenas and launch of a criminal probe. Look, we could go round and round debating any and all aspects of this situation, but I’m not sure it’s a productive use of anyone’s time. Does this undermine the Fed's independence? Yes. Has and does the Fed always operate inside a vacuum of independence? No. There has always been a grey area, as in the period of 1942 – 1951, when the Fed and Treasury acted in unity to pull us out of the debt the U.S. took on during WWII. This is one of many possible examples, but I don’t think it’s worth anyone’s time to ‘die on the vine’ of Fed independence (except of course, if you’re an economist or Fed member).
What’s more important as an investor is to evolve and adapt your thinking to what ‘is’ rather than what ‘you want it to be’. So far markets have taken much of the theatrics thrown at it from this administration in stride: tariffs (significant 15% sell-off over four days until the bond market forced the administration to cry Uncle and TACO), Maduro capture in Venezuela (oil prices are virtually unchanged), ordering private equity players to vacate the market for single-family homes while also instructing Fannie and Freddie to buy $200 billion in MBS bonds (housing stocks got bid up while mortgage rates remain little changed), pressuring defense firms to stop paying dividends or buying their stock (defense stocks rallied on the day of the announcement likely because Trump announced a significant increase in the defense budget at the same time), and the capping of credit card interest rates at 10% (modest sell-off in credit card related stocks).
These are the sorts of policies one would think would emanate from the likes of Elizabeth Warren, AOC, and Bernie Sanders. Then again, it has become very difficult to find anything similar to today’s Republicans from the Eisenhower, Reagan, or Bush(es) er
The irony of the DOJ's move on Powell is that it seemed to get lost on Trump that Jay Powell has actually emerged as one of the policy doves at the Fed and seems to largely share his interest rate view. Meanwhile, the incentive for Jay Powell to fill out his entire 14-year Federal Reserve Board of Governors term (ending in January 2028), even as his term as Fed Chairman ends, just took a major leap higher. So, while Trump is likely thinking this gets him his Fed chair sooner, it might backfire in a big way. What if Powell stays on to serve out his term and he commands more respect from markets than Trump’s newly appointed chair?
Let’s not forget the declaration to take over Greenland, by force or by other means. Unbelievable, right? I don’t take issue with anyone thinking as such, but for anyone reading this, know that the manner in which I evaluate any and all of this is from a market's first vantage point. That doesn’t mean I don’t care or have an opinion, but both are secondary to my objective analysis of things from an investment perspective. What’s fascinating about these incursions into ‘free market capitalism’ is that on the surface, they are actions that resonate with the public and are directed at inequities in a ‘free market system’. Are 25–30% credit card rates extortion? Yes, but obviously not high enough to stop some borrowers from tapping into this credit spigot. Is the defense industry fat on government excess? Likely, but adequate investment in national defense is necessary for a global superpower to maintain its standing.
Ok Corey, get to the point, what’s the market telling you? Much of this is irrelevant and little more than theater. What is driving markets in the near-term is a constructive liquidity backdrop from 175 basis points of rate cuts over the last 18 months, global monetary easing in 2024 and 2025, economic growth outside the U.S. improving, a pending fiscal impulse from the OBBBA front-loaded to the first half of 2026, moderating inflation prints, a goldilocks labor market, and robust corporate earnings where analysts’ estimates are holding firm for Q4 and 2026. Not to mention gold performing as a perfect safety valve for heightened policy uncertainty, ongoing currency debasement, and the transition to a ‘real’ over ‘financial’ asset investment regime.
Another thing we’re seeing playing out in stocks is a healthy rotation within the market as the AI frenzy of 2025 fizzles out. It hasn’t ended the equity bull market, with areas like financials, materials, industrials, and transports gaining steam. Not to mention the strength in small-caps, which is an illustration of confidence by the investment community in the economic outlook. The AI craze is also matriculating its way into other areas of the market, especially the power industry, with the nuclear renaissance theme getting yet another endorsement last week from the announcement that Meta inked a 20-year deal with Vistra to supply electricity from its nuclear facilities.
We’ve been on the nuclear energy revival train for many years now, mainly gaining exposure through uranium and uranium miners, which is the fuel source used to power nuclear facilities. On the uranium front, I think all investors with any exposure in the space should heed the message conveyed by Cameco COO Grant Isaac at the Goldman Sachs Energy Conference last week:
And this followed on the heels of a very powerful endorsement from the Department of Energy at the end of last year, which identified uranium as one of several minerals critical for national security interests. Get out your popcorn, it's been a great run in this sector over the last eight years, and I think this year is going to be fascinating to watch play out.
Notice Pursuant to the Defense Production Act of 1950
The week ahead is chock full of U.S. economic data, Fed speakers (I count at least nine of them), and the start of Q4 earnings season, led by the big banks — JPMorgan Chase, Bank of America, Morgan Stanley, and Goldman Sachs — and Taiwan Semiconductor will set the tone for large-cap Tech. The CPI report for December comes out Tuesday, and the markets are prepped for a less benign number (a pair of +0.3%’s for both the headline and core MoM) than what we saw last month (when many of the components for October were filled in with zeros). Then we get November producer prices on Wednesday, along with retail sales for the same month.
Let me wrap up this missive with some meandering thoughts on markets. Starting with the bond market, which has stopped responding to the economic data, at least when it comes in weak, nor do Treasuries even respond to the Fed any longer. In what is a historical rarity, since September 2024, the Fed cut the funds rate by -175 basis points, and yet the 10-year T-note yield is up over +50 basis points, and the long bond yield is up by more than +90 basis points. Could this price action in Treasury bonds and the move in gold (+24% in 2024, +60% in 2025, and +7% already in 2026) be an indication of investors' unwillingness to take on duration risk in this chaotic government policy environment, and lack of appetite by political leaders to curb the bloated fiscal deficit?
What the typical Treasury investor fears right now is the prospect of a fiscally juiced-up economy through the winter and spring. Though this has become a widely held consensus view, either that or fear of a prolonged era of financial repression is the only plausible explanation for why the bond market has turned a blind eye towards the recent softness in the macro data flow. As for the equity market, sentiment and momentum are potent sources of resolve that, when combined with supportive fundamental tailwinds and a lack of impactful shocks, are carrying stocks higher. Also, there is a well-ingrained belief system that President Trump will continue to find ways to prime the fiscal pump, that the AI boom will deliver a perpetual era of above-trend productivity growth, and thereby sustain double-digit earnings growth.
As for equities, the investment community has repriced the stock market as being the risk-free asset class, and I can say that with a high level of confidence because the S&P 500 earnings yield, at 2.5% on a CAPE multiple basis, is -10 basis points below the real yield on the 30-year Treasury bond. I acknowledge that today’s Tech giants are not the same ones we had on our hands in the late 1990s, but even though the current group has business models and cash-flow streams, balance sheets are being blown out nonetheless to fund the massive data-center expansion, and valuations are rich for business models that may require a high level of ongoing investment to maintain their competitive advantage.
That said, a question in the back of all investors' minds is what could occur that would topple the current state of goldilocks? It won’t be the Fed. It likely won’t be the economy, either, because we have had multiple weak nonfarm payroll reports and a rising trend in the unemployment rate, and the major averages have shrugged off the widening cracks in the labor market in a very impressive way. Either it takes some sort of financial shock, or it takes a monumental profits disappointment – it was the latter, after all, that touched off the Tech wreck in the winter of 2000, which actually occurred a full year before the recession began.
Clearly, the path of least resistance is higher until something knocks the marginal investor from his/her complacency and belief system that the stock market only goes in one direction. What that shock will be is anyone’s guess – but from what we have learned, it will not be from the economy, because it really doesn’t matter anymore for equity or fixed-income investors. More than likely, something unexpected, like news of canceled orders in the mega cap Tech space, or some sort of negative guidance from one of the blue chips, or signs of a default cycle (though clearly not at all yet evident in the market for credit spreads).
Maybe, just maybe, if the economy does not show solid momentum in the first half of the year from all the fiscal policy stimulus, that could be the catalyst for a correction, since a whole lot of growth is being priced in. But even with that, there is a good chance that any economic weakness will be treated with glee since it will mean the Fed will be compelled to cut interest rates even more. None of what I just rambled on about is actionable advice. It is more akin to an old man yelling at clouds, harkening to a time when he thought things made sense.
Moreover, this stream of consciousness is merely an attempt to say that the bond market is the nervous asset class right now, and the equity market is the one showing tremendous confidence. That sounds like a dream to any contrarian investor, but the facts on the ground suggest that this is a case of “what you see is what you get.” It's important to recognize that things have changed a whole lot in the financial system from the way they functioned decades ago – after all, a stock market that can so easily shrug off soft economic news when it arrives and a bond market that has failed to rally in a Fed easing cycle are not developments that are following the script from the past. I know everyone fears saying, ‘it's different this time’, but I believe it is, and that has been the case over the past decade and even more so since COVID.
That doesn’t mean I believe stocks are on a one-way trek higher, but rarely have I come across a period of time in my research where economic data has mattered so little to the price action in equity markets. We are in a period where the stock market leads the economy, not the other way around. That’s what investors should be taking their cue from, whether they like it or not.
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