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MARKET RECAP

• US stocks +1.27%, international +0.53%, bonds -0.25%.
• The small-cap index broke out to new highs, joining the other indexes.
• Forward EPS multiples recently reached their highest levels since 2021 (~22.6x). Earnings yields are now below long-term Treasury yields, indicating an expensive market.
• Last week’s spike in jobless claims reversed; continuing claims remain stable, suggesting no broad labor deterioration.
• The FOMC cut rates for the first time after months of holding steady, citing “risk management” despite stronger growth and inflation forecasts. Median projections suggest one to two more cuts by year-end.
• The U.S. dollar index is down over 10%, its most significant drop since 2011, boosting foreign equities and commodities.
• No matter what you think about tariffs, one benefit to the government is significant revenue. Torsten Slok of Apollo reports that the government is bringing in about $350 billion annually, which would equal about 19% of the annual household income tax.

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MARKET RECAP

• US stocks +1.49%, international +1.83%, bonds +0.44%.
• The 2-year note is now at 3.56%.
• Investors are counting on a fed rate cut.
• Initial jobless claims hit the highest level in four years. Texas appeared to be a significant contributor and may be linked to the floods in early September. Remove Texas, and the number aligns with recent reports.
• Real-time economic activity trackers are holding steady. Restaurant bookings, US air travel, Las Vegas visitor volumes, same-store retail sales, and hotel bookings are all solid, according to Apollo Chief Economist Torsten Slok.
• CPI was up 0.4% month over month and 2.9% year over year. Core CPI was up by 3.1% year over year and 0.3% for the month.
• Conservative personality Charlie Kirk was assassinated at a college campus in Utah, at one of his famous “Prove me wrong” events, casting a dark pall on the state of the country.

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MARKET RECAP

• SP500 +0.33%.
• Coming into the week, the SP500 is trading at 22.5x earnings over the next 12 months, way above the 16.8 average since 2000. The 10 companies in the index make up 39.5% of its market cap, which is the highest percentage on record. On an equal weight basis, the index trades at 1.76 times sales compared to the long-term average of 1.43.
• Only 22,000 new jobs in August, less than the forecast of 75.000. Manufacturing lost 12.000 jobs. June was revised to a loss of 13,000 jobs, the first loss since December of 2020. The unemployment rate increased to 4.3% from 4.2%.
• Trump continues to hammer away at the Fed, demanding the firing/resignation of Fed Governor Lisa Cook. The market has so far shrugged off the attack on Fed independence, but this is unprecedented, and at some point, the market might take a more serious notice.

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The AI boom has kept this bull market on fire. While no one doubts the transformative power of AI, and we don’t yet know the full impact, if the gigantic investments don’t yield substantial profits later, there will be problems. According to Greg Ip’s column in today’s WSJ, “investment in information processing equipment has expanded 23%, after inflation, while total gross domestic product has expanded just 6%.” Half of the GDP growth in the first half of the year was due to AI investments. AI is essentially driving this economy, mitigating some or all of the negative impacts of immigration and tariff policy.

Companies like Alphabet, Meta, Amazon, and Microsoft used to be free cash flow juggernauts. Since 2023, while net income increased for these companies by 73%, free cash flow declined by 30% to $40 billion, according to FactSet. Other start-ups like OpenAI and Anthropic are losing money.

These companies are no longer the asset-light businesses that investors fell in love with.