Fed’s Favorite Wage, Inflation Measures Both Cool
The Fed's preferred measures of compensation costs and inflation came in softer than economists expected, the last of this week's top-tier US data releases showed.
The Employment Cost Index rose 1% in Q2, the BLS said Friday. That was slightly below the 1.1% consensus.
I'm compelled to recycle the backstory. Context is key here. This is the series which, according to his own dramatized retelling, compelled Jerome Powell to change his mind about the likely trajectory of inflation in the US. Put
Mid-cap trades at forward PE 14X (proxy MDY), small-cap at 14X (proxy SPSM). Large-cap trades at 20X (proxy SPY) but remove the Galactic Seven and the S&P 493 trades at 17X with the average S&P 500 name around 16X (proxy RSP). This is not cheap if recession is imminent, estimates falling, and rates rising fast. But recession is not imminent (not in 2Q or 3Q, anyway), estimates are not falling (as far as I can see from earnings so far), and as discussed investors have diminishing need to fear the Fed (and so far, buyers have absorbed Treasury’s flood of bill issuance; we’ll see about coupon issuance). In this situation, valuation doesn’t feel like a major constraint (at index level).
S&P 493. First I’ve seen that. Thanks for presenting it. Useful analysis.
As for the Galactic Seven, here are the NTM PEs, consensus 2023-2024 EPS growth, cons 2023-2024 sales gro, cons 2023 EBIT margin, cons 2023 FCF margin, market cap, and pithy comments.
GOOG 21X 20% 12% 28% 25% $1.7TR – can AI fears ebb and topline growth resume?
META 22X 18% 12% 32% 22% $0.8TR – can metaverse burn ebb and topline growth resume?
AAPL 30X 10% 7% 29% 26% $3.0TR – how +MSD growth merits 30X is left as an exercise for the reader
MSFT 30X 15% 13% 43% 29% $2.5TR – monopoly plus AI oppty plus massive margins
NVDA 48X 41% 35% 49% 38% $1.1TR – how long will AI processor monopoly/Gold Rush last?
AMZN 60X 71% 12% 4% 3% $1.3TR – out-year cons expects massive FCF, never w/ Bezos, ??? w/ Jassy
TSLA 63X 41% 29% 11% 6% $0.8TR – what assumed future recurring revenue per car equals 63X
Total GALACTIC SEVEN 39X 31% 17% 28% 21% (simple avg) $11.4TR (sum)
Compare to a classic “defensive”
PG 24X 8% 4% 23% 18% $0.4TR
Thank you for highlighting that ordinary people’s wages and real purchasing power didn’t keep up for a long time, especially less “discretionary” expenses like rent, healthcare, and higher education.
What I’ve been hearing/pondering is the “great deferral”: between the Commercial Real Estate that’s slowly/lumpily recognizing the overvaluations, the Fed allowing Banks par value for 0% yielding assets, and large companies that loaded up with 0% but in a year will start needing more debt…
(So yes, equities will float for a year and hope the Fed Put comes at the exact right time…)