The road ahead for the record rally

The market anticipates a 25 basis point rate cut, which is considered "baked in" by most. However, a surprise 50 basis point cut or no cut at all would be highly unexpected. The current market backdrop is characterized by a tranquil environment, with the S&P 500 closing down more than 1% on only three days since late April. This suggests that the expected rate cut is largely priced in, and a slight pullback after the announcement is possible, though not a reason to sell.

Several positive factors are driving the markets, including a growing economy with low unemployment, deregulation, and increasing profit growth. The economy is performing better than expected, with Atlanta Fed projecting around 2.5% to 3% growth, translating into stronger earnings. The consumer remains a crucial economic driver, supported by jobs, wage growth of 5%, and decreasing inflation. A manufacturing renaissance and strength in data center-related investments are also noted.

Despite some labor market concerns, the overall economic picture is strong, allowing for Fed easing from a position of strength. This is expected to lead to a strong fourth quarter, with earnings continuing to lead the market's charge. The broadening of market gains beyond tech into sectors like financials and industrials is seen as refreshing, and there's optimism for consumer discretionary stocks, particularly those that have lagged, to catch up.

• A 25 basis point rate cut is widely expected from the upcoming Fed meeting.
• The market has experienced a tranquil environment since late April, with the S&P 500 closing down more than 1% on only three days.
• Positive economic indicators include a growing economy, low unemployment, deregulation, and increasing profit growth.
• Consumer spending is robust, supported by jobs, 5% wage growth, and declining inflation.
• Several sectors, including tech, financials, industrials, and consumer discretionary (especially those that have lagged), are poised for growth.

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Fed Meeting and Market Expectations [00:00]

• The Fed meeting is a significant event, with a 25 basis point rate cut widely anticipated.
• A 25 basis point cut is considered "baked in," and anything deviating from this, such as a 50 basis point cut or no cut at all, would be a significant surprise.
• The likelihood of a "hawkish cut," where the Fed signals a prolonged restrictive stance, is considered low and would also be surprising.

The 25 basis points is is probably baked in at this point in time. It would be a very big surprise, which they don't like to do, to do more than that, to do 50 or to not cut at all.

The current market sentiment is that a 25 basis point rate cut is a foregone conclusion, and any deviation would constitute a major surprise for the Fed and market watchers alike.

Market Volatility and Current Environment [00:45]

• The market has shown an "inexorable march higher" since late April, experiencing only three days of more than 1% declines for the S&P 500.
• This has created a "very tranquil environment" recently, suggesting that the anticipated rate cut is largely priced in.
• It's possible the market might give up some gains in the wake of the Fed announcement, but this doesn't signal a need to sell stocks.

There are too many positive things going on in the markets right now.

The current market conditions are unusually calm, indicating that future events, like the Fed's rate decision, may already be factored into stock prices, leading to potential short-term fluctuations.

Positive Market Drivers [01:35]

• Key positive drivers include a growing economy, low unemployment rates, deregulation, and growing profit growth.
• Despite some worries about the labor market, overall employment remains strong.

We've got a growing economy. I'm sure we've got some worries about the labor market, but we still got low unemployment, deregulation, growing profit growth.

The underlying economic fundamentals are strong, contributing to a positive market outlook.

Economic Performance and Earnings Growth [01:56]

• The market has seen a significant rise of 32% from the April 8th lows, indicating a period of strong performance driven by positive news.
• Unknowns related to tariffs, the Fed, inflation, and geopolitical issues are gradually being addressed.
• The economy is performing strongly, exceeding initial expectations for the year, with Atlanta Fed projecting around 2.5% to 3% growth.
• This economic strength has translated into better earnings, which are the primary focus for equity markets, and earnings have been revised higher and are expected to continue this trend.

Stronger than probably even we thought starting the year.

The economy is outperforming expectations, leading to robust earnings growth that is fueling the equity markets.

Consumer Strength and Economic Outlook [02:47]

• The consumer is the most critical component of the economy, representing 70% of its activity.
• Consumers have jobs and are experiencing wage growth of 5%, while inflation is decreasing.
• A manufacturing renaissance is underway, and sectors tied to data centers are showing strength.
• The labor market is cooling but not collapsing, allowing the Fed to ease from a position of strength.
• The fourth quarter is anticipated to be strong, driven by continued earnings growth.
• The broadening of market participation across various sectors, not just tech, is a positive development.

So the Fed can ease. they probably should ease, but it's from a position of strength in the economy in my mind.

The consumer's solid financial footing, coupled with a cooling labor market, provides a strong foundation for economic growth and allows the Fed to implement supportive policies.

Sector Analysis and Investment Opportunities [03:26]

• The market is broadening out, with financials and industrials performing well in addition to tech.
• The consumer discretionary sector, which has lagged, is expected to play catch-up.
• August retail sales data exceeded expectations, suggesting strong consumer activity.
• Bank of America's consumer spending data also indicates healthy growth.

I like consumer because that's actually that sector's lagged. And I think that's going to play catch-up.

While some consumer discretionary stocks have lagged, there is a strong belief that this sector is poised for a rebound, supported by positive consumer spending trends.

Consumer Spending Trends [04:12]

• Back-to-school spending was very strong, with credit card data from Chase and American Express showing acceleration in August.
• Companies and banks have reported positively on consumer performance in recent weeks.
• This strong back-to-school season is a positive indicator for upcoming holiday sales.

Every bank last week at Barclay said how good the consumer was.

Evidence from credit card data and corporate reports points to robust consumer spending, setting a positive tone for future sales periods.

Specific Stock Recommendations and Valuations [05:00]

• Deckers, a company with strong brands like Hoka and UGG, is mentioned. While its stock is down 43% year-to-date, it is expected to see growth due to double-digit earnings and margin expansion.
• Gap is another mentioned stock, with potential if a denim cycle emerges. The company is gaining market share in denim.
• Target is presented as a turnaround story, trading at 11 times earnings with a 5% dividend yield, and benefiting from an internal CEO with deep company knowledge.
• Chipotle announced an increase in its buyback, and its stock trades at 29 times forward earnings, which is below its historical average of 46 times.

Now, I don't think it is. I like the Gap. If we have a denim cycle, which my daughter, my 18-year-old says it, we've had a denim cycle for a while and we're going to continue.

Several consumer-focused companies are highlighted, with specific reasons for optimism based on brand strength, market share gains, turnaround potential, and attractive valuations.