Policy
US aerospace and defense stocks still have a structural tailwind from geopolitics, but face rising cyclical challenges from macro and market fundamentals, as well as eventual Iran and Ukraine ceasefires and political change in the United States.
The US Treasury department’s attempts at yield suppression are doomed to fail unless the Federal Reserve gets involved.
An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.
Left-wing populism will likely prevail within the Democratic Party and inspire large tax hikes in 2029. But the US does not face a socialist takeover.
Despite today’s hold, the bar for a rate hike in September remains low and contingent on the next two core CPI reports.
As long as the AI boom keeps booming, all other investment considerations will remain on the back burner. However, if the AI trade fizzles, this would expose deep-seated problems within the global economy, which could very well lead to an economic downturn as early as next year.
The Supreme Court, Senate, Fed, and other institutions have proved resilient so far under the Trump administration. US institutional erosion is overstated.
