A New Interest Rate Regime

* Correlation between stocks and yields reversed in December, contributing to market struggles at the end of the year and the beginning of this year.
* Good economic data may no longer be positive for stocks when yields exceed 4.5%.
* A fall in yields below 4.5% could stimulate stock growth, assuming rates do not decline too rapidly due to concerns about slowing growth.
* If rates rise further, stocks will face challenges.
* A rise in 10-year Treasury yields towards 5% raises concerns due to the potential impact on market sentiment.
* High-quality companies with strong balance sheets and low leverage are considered more resilient in a high-interest rate environment.
* The term premium, the additional yield investors demand for holding longer-term bonds over short-term bonds, has risen due to uncertainty about Fed policy.
* Inflation expectations, fiscal imbalances, and evolving investor sentiment are contributing to a higher term premium.

Tariffs and Trump

* The economic consequences of President Trump's trade agenda are highly uncertain.
* Proposed tariff increases could significantly impact consumers and businesses.
* Tariffs could lead to higher inflation and reduced economic growth.
* A universal tariff would impact all imports, while more targeted tariffs could affect specific industries.
* Artificial Intelligence (AI) analysis indicates increased mentions of tariffs in S&P 500 earnings calls under the Trump administration.
* President Trump's immigration policies will impact the labor market, potentially leading to labor shortages and higher wages.

Making Sense of This Bull Market

* Current economic conditions are strong and rare, with low unemployment and solid GDP growth.
* Historically, such conditions have supported strong stock market performance.
* US exceptionalism has contributed to a wide valuation gap between the S&P 500 and European counterparts.
* The "Magnificent Seven" companies have dominated equity performance, but the earnings growth gap with other S&P 500 companies is narrowing.
* Labor-efficient companies have outperformed their peers in recent years, and this trend is expected to continue.
* Despite elevated valuations, the multiple of the US equity market is considered fair based on macroeconomic and corporate fundamentals.
* High future expected earnings growth supports high valuations, particularly for large tech companies.
* Rising S&P 500 forward earnings estimates have been a key driver of market gains.
* The ISM manufacturing index turning up in 2025 is considered a positive signal for cyclical earnings growth.

The Economic Cycle Turns

* The US business cycle has become less volatile, with fewer recessions in recent decades.
* Inverted yield curves, when long-term Treasury yields fall below short-term yields, have historically preceded recessions, but the recessions occur after the curve normalizes.
* Consumer spending has been a major driver of economic growth in the US, Canada, and Australia, while other developed markets have experienced slower growth.
* Investment has also played a role in divergent economic performance.
* Inflation is expected to moderate in the future, and household balance sheets remain strong.
* The economy is vulnerable to a sell-off in the stock market, which could reduce consumer spending.
* Labor productivity growth has accelerated, but the slowdown in hiring and the quit rate may limit the reallocation of workers to more productive jobs.
* Job growth is slowing as the unemployment rate approaches the Fed's long-run expectations.
* Wage growth is moderating as the labor market balances.
* Training and skills development are essential for employee retention and economic growth.
* Technology is increasingly driving the real economy, with a growing share of US GDP.
* Fiscal policy has taken precedence over monetary policy as the primary driver of markets.
* The rising budget deficit and current account deficit pose long-term risks.