Teeter: Tariffs will extend the process of Fed rate cuts

Key Concepts:

• Economic uncertainty and its impact on consumer spending
• PCE (Personal Consumption Expenditures) and its role in assessing inflation
• Tariffs and their potential effects on inflation and corporate earnings
• Market valuation and Price-to-Earnings (P/E) ratios
• Corporate earnings and profit margin expansion
• Federal Reserve (The Fed) rate cut policy

1. Economic Data and Uncertainty:

• The upcoming jobs report and JOLTS (Job Openings and Labor Turnover Survey) data are crucial for understanding the health of the labor market and wage gains.
• The speaker believes that the current environment of uncertainty may be causing consumers to hold back on spending.
• Healthy jobs numbers and wage gains could encourage consumer spending.

2. PCE and Inflation:

• PCE data will be closely watched for signs of inflation, particularly related to tariffs.
• While PCE is expected to be within an acceptable range for the Fed's inflation target, tariffs could complicate the path to 2% inflation.
• Tariffs are viewed as one-time adjustments that are unlikely to cause the Fed to raise rates but could delay rate cuts.

3. Tariffs and Market Impact:

• The market is trying to anticipate the impact of tariffs, leading to investment strategies like hedging through auto parts companies (O'Reilly and AutoZone reaching all-time highs).
• The performance of rental car companies is also being influenced by the dynamics between new and used car prices due to tariffs.
• The speaker emphasizes that the overall story of the year will be determined by the economy and corporate earnings, with potential for profit margin expansion in certain sectors.

4. Earnings Season and Market Valuation:

• Q1 EPS (Earnings Per Share) estimates are just over 7%.
• The forward P/E ratio is around 21 times, suggesting the market may be priced close to perfection.
• The speaker believes the market is vulnerable to earnings misses, especially without a valid explanation.
• Qualitative factors, such as disruptions due to tariffs, will be considered when evaluating earnings results.

5. Profit Margin Expansion:

• The speaker is looking for sectors with the potential for significant profit margin expansion.
• The focus is on identifying companies that can maintain or improve profitability despite the challenges posed by tariffs and economic uncertainty.

6. Fed Rate Cut Policy:

• The market is anticipating potential rate cuts from the Federal Reserve.
• The impact of tariffs on inflation will influence the timing and extent of these rate cuts.
• The speaker suggests that tariffs could delay the Fed's rate cut process.

7. Cautious Approach:

• The speaker advocates for a cautious approach, focusing on long-term economic trends and corporate earnings rather than reacting to daily news flow.
• The potential for tariffs to change quickly makes it risky to make investment decisions based solely on tariff-related news.

8. Notable Quotes:

• "That's going to get very messy and chaotic as the year goes on with assessing the impact of these tariffs."
• "We're right on the edge of that." (referring to market valuation being priced to perfection)

9. Technical Terms:

• PCE (Personal Consumption Expenditures): A measure of inflation based on consumer spending.
• JOLTS (Job Openings and Labor Turnover Survey): A survey that provides data on job openings, hires, and separations.
• EPS (Earnings Per Share): A measure of a company's profitability.
• P/E Ratio (Price-to-Earnings Ratio): A valuation ratio that compares a company's stock price to its earnings per share.

10. Synthesis/Conclusion:

The speaker emphasizes the importance of economic data, particularly the jobs report and PCE, in assessing the current economic environment. Tariffs are a significant concern, potentially impacting inflation and corporate earnings. The market may be priced close to perfection, making it vulnerable to earnings misses. A cautious approach is recommended, focusing on long-term trends and profit margin expansion rather than reacting to short-term news. The Fed's rate cut policy will be influenced by the impact of tariffs on inflation.