Truist Wealth's Keith Lerner: Bull thesis holds, even with expected choppier near-term environment

Key Concepts

• Federal Reserve (Fed) rate cuts and their impact on the stock market
• Jackson Hole Economic Symposium and Fed Chair Powell's speech
• Inflation reports and employment data as key economic indicators
• Market rotation and performance of different sectors (small caps, homebuilders, tech)
• AI as a dominant theme in the current bull market
• Earnings momentum and its relation to market trends
• Valuations, credit spreads, and economic resilience
• Seasonality and potential market chop in August and September
• Fiscal policy and the "one big beautiful bill" (likely referring to the Inflation Reduction Act)
• Economic growth forecasts and their impact on earnings and market performance

Jackson Hole and Fed Policy

• Market Expectations: The market is pricing in an 85% chance of a Fed rate cut in September, indicating high expectations for dovish signals from Fed Chair Powell at Jackson Hole.
• Powell's Stance: Keith Lerner anticipates Powell will maintain a somewhat tight stance, considering upcoming inflation reports and the crucial September 5th employment report.
• Potential Market Reaction: While a hawkish tone could cause a short-term setback, Lerner believes it won't disrupt the overall upward trend of the market. Small caps and homebuilders, which are heavily reliant on rate cuts, are likely to experience more pronounced reactions.
• Scenario Analysis: If Powell suggests a smaller 25 basis point cut in September with optionality for October and December, the market is expected to react positively.
• Dovish Language: The market is looking for dovish language hinting at a shift in the balance between inflation and employment, justifying an "insurance cut" in September.
• S&P 500 Drivers: Rate cuts are not necessarily crucial for the S&P 500, as its performance is primarily driven by tech and communications sectors with a focus on secular growth. The S&P 500 is up 10% YTD without any rate cuts.

Economic Context and Market Conditions

• Current Environment: Despite stocks at all-time highs, strong Q2 earnings, and historically low corporate spreads, the discussion of rate cuts persists.
• Historical Perspective: Historically, rate cuts wouldn't be expected in such an environment.
• Market Interpretation: High valuations and tight credit spreads can be interpreted as either complacency or confidence in the economy's resilience.
• Economic Resilience: Companies have demonstrated resilience in the face of various shocks over the past five years, including inflation, rapid interest rate hikes, and tariffs.
• Raised Bar for Surprises: The current environment raises the bar for positive surprises, given the existing positive sentiment.
• Seasonality: August is typically weak, and September is historically the weakest month of the year, potentially leading to market chop.
• Underlying Bull Market: Despite potential short-term volatility, the underlying bull market trend should be given the benefit of the doubt.

AI and Technology Sector

• AI vs. Tariffs: AI has been a more significant market driver than tariffs.
• AI Bubble Concerns: Despite concerns about an AI bubble (e.g., Sam Altman's comments, questions about GPT-5, and China's AI technology), the technology sector exhibits the strongest earnings momentum in the market.
• Earnings Momentum: The relative earnings momentum for tech and communications compared to the rest of the market is increasing.
• Bubble Threshold: The technology sector is up about 27% year-over-year, which is below the 90-100% range that would indicate a bubble.
• Key Theme: AI and technology remain the dominant theme of the current bull market.
• Recommendation: Continue to stick with the underlying positive trend in the technology sector until earnings trends shift.

Future Catalysts and Market Outlook

• Expected Market Chop: Expect market chop in the near term (next month or so).
• Positive Outlook for 2025: The market is still expected to end higher in 2025.
• Key Catalysts:
  • Continued strong technology earnings.
  • The "one big beautiful bill" (Inflation Reduction Act) is somewhat underappreciated, with front-end loaded incentives and tax rate adjustments.
  • Clarity on the tax bill and reduced uncertainty regarding tariffs.
  • A projected increase in economic growth from 1.3% this year to 1.8% next year.
• Market Dynamics: Markets tend to follow earnings, and as long as the economy and earnings move forward, markets can move higher.
• Expected Trajectory: Expect a slower, more gradual upward trajectory due to current valuations, with "two steps forward, one step back."

Conclusion

Keith Lerner suggests that while short-term market chop is likely due to seasonality and high expectations surrounding Fed policy, the underlying bull market trend remains intact, driven primarily by the technology sector and AI. He emphasizes the importance of monitoring earnings trends and economic growth, and believes that fiscal policy and reduced uncertainty will contribute to continued market gains, albeit at a potentially slower pace. The market's resilience in the face of recent economic shocks suggests a degree of confidence in future growth, but also raises the bar for positive surprises.