We are looking at the major US stock averages opening in negative territory with chip stocks leading the way lower while Wall Street is wrapping up a critical week of macro shifts and back to back soft inflation prints from both CPI and PPI here in the US did drive bond yields lower and did slash the odds of a July Fed rate hike lower.
Meanwhile.
New military strikes in Iran and climbing oil prices, our markets prematurely celebrating a trajectory that is still volatile while in New York morning trade.
We are looking at the higher by nearly 14% and beyond the inflation fight, we face a high stakes in the boom as well as an upcoming midterm election year that historically does royal.
Portfolios and here to navigate the second half of the year is Sony for chief macro strategist at Carson Group.
So happy Friday.
Thank you so much for joining us.
So this week was a busy week of earnings as well as inflation figures, and we are looking at oil prices climbing yet again.
So where do we go from here as we head into the second half.
First of all, thank you for having me again, Remy.
It's a pleasure to be here this morning, even though markets look a little choppy.
And that gets to what we talked about in our just released mid-year Outlook 2026.
We call it still riding the wave.
Our original 2026 outlook was riding the wave.
And what we meant by that was, look, there's a big, uh, massive technological shift happening.
And that's the AI wave that matters to markets, that matters to the macroeconomy as well.
It's a macroeconomic story.
I would argue it's also, it's also an inflation story.
And at the same time, you know, while we want to ride that wave, we want to be careful about avoiding a wipeout.
And that's literally where we are at today.
We want to be diversified.
We want to be overweighted a little bit to the AI story and the AI wave and momentum and chip stocks and all of that, but we don't want to go all. right?
And that's brought to bear over, you know, gosh, what we've seen over the last two weeks, we've seen some choppy action, especially in the chip sector, with momentum stalling a little bit as well.
But there's good breadth.
There are other parts of the market that seem to have taken the baton, and that's why we want to be diversified to sort of take advantage of the fact that There may be a rotation in place.
It may be temporary.
We think the wave will continue for the rest of the year, but again, we want to be positioned for a potential rotation as well.
Yes, and I really like that analogy to surfing since it is summertime and we should be on the beach, right?
But it's been quite the start to earnings season with stellar results for the big banks.
So I understand that you just raised your S&P target and it is a volatile year for the broader market.
So given earnings growth expectations, where does the fuel come from to actually push stocks even higher?
Uh, basically, a lot of this cap ex spending, and again, this relates to the AI wave.
By the way, I should say that I don't surf.
So, I don't know if any of my colleagues do either, but that is an aspiration, certainly as we keep talking about the wave.
But again, avoiding the wipeout is key there as well, because I think they'll be, we'll be falling quite a few times.
But anyway, going back to your question about, you know, where does the potential or energy to fuel.
Uh, 6 month rally in the back half of the year come from.
I think it's from investment spending on the AI infrastructure buildout from a lot of the companies.
One company's spending is another company's revenue and profits.
And at the same time, profits are being driven, yes, by sales growth, which is tied to nominal GDP growth.
Nominal GDP growth is running about 5 to 6% right now.
That's pretty odd, but it's also margin expansion.
Right?
You see all these chip companies and, you know, a lot of other tech companies continuing to post record margins, record gross margins.
I think that's fuel really for a potential rally in the back half of the year.
And that's why we raised our target.
We started the year with 12 to 15% for the S&P 500.
We raised it to 15 to 18%.
That is above the historical average of about 10% or so, I should say, well above it.
Yes, and so there's a reason why there are so many sports analogies when it comes to the markets overall.
But when we're taking a look at the bond market, it goes without saying that bonds have had a rough first half, and I understand that you also nudged your 10-year Treasury target higher.
So given that uncertainty regarding inflation, is inflation going to get worse before it gets better?
And can you explain to the layperson how bonds are diversifying diversifiers?
Right.
And so this gets to the fact that we think, we've thought for the start of the year, even the end of last year, that we are in an inflationary growth environment.
So, usually, when everyone thinks about inflation, uh, the phrase that comes to mind is stagflation.
And, but that's a scenario when You have elevated and rising inflation, but you also have elevated and rising unemployment.
We don't have that right now.
The unemployment rate is going down.
It's down to 4.2%.
Last fall, it was a little more scary.
It was at 4.5%.
So the labor market picture looks a little better, but the inflation picture has gotten a lot worse.
And yes, part of it is due to energy and maybe even tariffs that may flow through the system, like some of the Fed governors and presidents of, you know, I think waiting for that inflation.
To pass, but we think there are other inflationary pressures, including from the AI related buildout.
And like, again, one company's margin expansion, expansion is yours and my inflation, right?
Now, in an inflationary growth environment, that's good for stocks, it's not that great for bonds.
And that is why we feel in this sort of scenario, we want to diversify our diversifiers.
Look, we don't want to throw bonds out of the portfolio.
We want to have bonds in the portfolio, because if you're wrong, and let's say there's A big recession.
We don't think that's the case, but if there is one, you want to have long duration bonds.
But if you also have elevated inflation, we want to have things like managed futures, exposure to commodities, including whether it's oil, maybe some gold in there as well.
But that's what we are looking at when we think about an entire portfolio.
Yeah and so we don't need any reminders that it is a midterm election year but do you expect total gridlock and the nation's capital and can you explain to us why a divided do nothing Congress is actually the best case scenario for the stock market as we count down to November.
I think you said it yourself, do nothing if Congress does nothing, if Washington does nothing, I think there's less uncertainty to price in whether it's policy to one end of the spectrum or the other end of the spectrum.
For now, we have a bit of a tailwind from the tax cuts from last year, so that fiscal deficit is still expanding.
There are tariff refunds in place as well.
Now, there could be new tariffs coming in.
But, you know, fiscal deficit is running around 6 to 7% of GDP.
We think, you know, that's, that's obviously really high, but that's also pushing more money into the economy, right?
That's more spending, right?
Again, one person's spending, in this case, the government spending.
Is, you know, somebody else's revenue and profits that adds to profits.
And it gets back to your original question, Remy, what drives, you know, uh, a rally in the back half of the year as we think there will be a rally.
It's earnings growth.
It's driven by the AI infrastructure buildout, fiscal spending, continued fiscal deficits, and as long as there's gridlock in Washington, it's status quo, and what we have right now continues.
And finally, before I let you go, your advice for the second half of the year is to keep riding the wave, but you admit the water is getting rough.
So personally, I don't really love surfing.
I actually prefer paddle boarding.
I don't know if that tells you anything about my risk tolerance or investment style, but how do you tell the difference between normal choppy volatility and a real signal that it's finally time to paddle back to shore and hang up the surfboard.
I think one thing I'm watching for is, especially since we're in the middle of earnings season, uh, our companies come continuing to spend.
If they continue to spend, you know, that's fuel for profits for somebody else.
Right.
Now, at some point, that we may reach a point where companies are like, OK, we are going to pull back a little bit, or we're not going to grow the spending on AI infrastructure as much as we did over the last year or 1 year and a half.
Now, that tells me, OK, things are bound to get choppier.
I don't know if we're there yet.
I know we're seeing some volatility in markets, but we always see volatility in markets.
Uh, but, you know, coming into the back half of the year, momentum, which is riding the AI wave through chip stocks for the most part, not through the mag 7.
The mag 7 is underperforming.
I was riding chip stocks, momentum was really stretched.
So I think you're taking a bit of a breather here.
I think it's more consolidation.
I don't think it's broken, but at the same time, look, we don't have the benefit of hindsight, and that's why you want to be diversified into other areas of the market.
One way we like to do that is by barbelling momentum with low volatility stocks, which doesn't have that many, that much exposure to the AI wave.
Well, So, we will have to leave it there, but as you mentioned, the mag 7, there's a reason why some people have been referring to those names as the LAG 7 recently.
So thank you so much for joining us this morning and weighing in and have a great weekend, Sonu.
Thank you.
