Morning Notes — Peak Inflation

Sell-side research analysts should be done with one-year forward estimate cuts by the end of Q2 earnings season (end of August/early-September).  Market cycles follow a pattern, and year forward estimate cuts often act as clearing events for investors with a 12-24 month outlook. These are generally ‘long only’ portfolio managers with decades of experience and significant dry powder. The late-August/early-September timeframe also fits our revised outlook for realized inflation data to miss.  Lower realized inflation should lead to lower terminal Fed expectations, which currently sit about 100bp (~3.50%) above what most people consider as the ‘neutral rate’ (~2.65%). A terminal rate below 3% should be the catalyst to push the S&P 500 (SPX) through technical resistance between 4100-4150.

It may seem too early to add broad equity exposure, but extreme bearish sentiment and light positioning should provide enough cover to add some deep value regional banks and semis that have already rerated with signs of cycle trough.