Stocks’ Rally Could Stall After Hot PPI Report

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Are Stocks Over Their Skis?

Sevens Report
Kinsale Trading
Aug. 15: The July Producer Price Index was the latest in a string of economic data points to materially surprise markets versus expectations, as the headline surged by the most since March 2022, with a month-over-month rise more than four times the consensus estimate.

The hot PPI report presents a multifaceted threat to the prospects that the equity market rally will continue to new highs between now and the end of the year, as upside inflation risks were not on the radar prior to the July PPI….Rising producer prices pose a threat to corporate earnings estimates, while simultaneously suggesting the Fed is more likely to face a mandate dilemma if labor market data continue to deteriorate while inflation begins to rise again, the textbook definition of stagflation. If a stagflationary economic environment emerges in the second half of 2025, equity markets are well over their skis, with the S&P 500 trading at a 22-times multiple of what could prove to be overly optimistic 2026 earnings expectations.

Tom Essaye

China Needs Policy Support

THINK economic and financial analysis
ING
Aug. 15: Chinese economic activity slowed across the board in July, with retail sales, fixed asset investment, and value added of industry growth all reaching the lowest levels of the year.

China’s 70-city property price index showed that prices continued to decline. From the peak, new home prices are now down 10.7%, while used home prices are down 18.8%.

The breakdown at the city level showed widespread weakness. Only 10 of 70 cities saw new home prices stabilize or pick up, the lowest number in nine months. Only two cities (Taiyuan and Xining) saw used home prices stabilize or pick up.

The accelerating downturn in property prices in the past few months signals that further policy support is needed. Given the high exposure of Chinese households to real estate, establishing a trough on prices is one of the most important factors in restoring confidence and generating a sustained consumption recovery. This is particularly important as domestic demand is targeted to become an increasingly important economic driver. It is difficult to expect consumers to spend with greater confidence if their biggest asset continues to decline in value every month.

The good news: After a bit of a lull period, we could soon see more support rolling out.

Lynn Song

Silver Shines Anew

Articles
Ahead of the Herd
Aug. 14: Silver is up around 30% year to date, surpassing even gold. In January 2025, the Silver Institute forecast another deficit in the silver market, with annual demand at 1.2 billion ounces and supply at 1.05 billion ounces. The 150-million-ounce shortfall would mark the fifth consecutive year that silver demand outstrips supply.

Could silver breach the all-time high in 1980 of $50.32? The technical analysis looks promising.

The bullish factors for silver include ongoing supply deficits, as silver miners fail to keep up with demand from the solar power sector and electric vehicles, specifically. Solid-state batteries and new applications like AI data-center chips, advanced electrical relays, smart grid infrastructure upgrades, and every U.S. manufacturing facility will pile on more demand for silver. Mine supply has shrunk 7% since 2016.

The investment case for silver is also strong and getting stronger, as market participants price in at least one rate cut in September, and possibly another in December, despite the threat of inflation posed by the Trump tariffs, as imported goods get more expensive….A rate cut in September would certainly be a tailwind for precious metals.

Richard Mills

Earnings Season Stats

Equity Strategy
Evercore ISI
Aug. 12: 453 S&P 500 companies (86% of the index market cap) have reported 2Q results. Reported sales growth has been +6.3% and earnings +11.0%—surprising by +2.4% and +8.2%—putting overall sales growth on pace for +6.3% and earnings for +11.7%. Extrapolating, [our] expected +5.3% surprises to the balance of companies reporting suggests earnings +12.4%. The average stock price fell -0.1% post-results. Companies beating on both the top and bottom line are higher by +0.6% on average versus +0.8% on a five-year average, and “double misses” are lower -0.8% versus -3.2% on average.

Julian Emanuel, Michael Chu, Barak Hurvitz, Steven Fandozzi

Praying for a Rate Cut

A Small Company Story
Paulsen Perspectives
Aug. 11: Everyone is tired of hearing that “small-caps” are about to outperform. I am too! Nonetheless, something big may finally happen and it will likely be a game changer. The Federal Reserve seems to be edging ever closer to finally adopting an accommodative monetary policy. This might not mean much for the seemingly self-sufficient megacap darlings, but it’s everything for much of the broader marketplace.

For companies that have been facing declining sales, earnings, employment, and confidence for years, it would be an answer to prayers to finally get some broad-based support from the Fed. A cut in the fed-funds rate would likely lead to lower long-term yields, a steepening in the yield curve, a quickening in the growth of the money supply, a further lowering of the U.S. dollar, and perhaps a broad-based jump in economic confidence.

I know, I know, it’s been said too many times. But a Fed ease could end the schizophrenic U.S. economy, reconnect large and small company performances, and finally make small-cap and other broader market plays “winners” for a period.

Jim Paulsen

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