US stocks hit new highs, 42 million people fear they could lose SNAP benefits

Key Concepts

• Mergers and Acquisitions (M&A): The process of combining companies through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
• Deal Volume and Value: Metrics used to measure the activity and worth of M&A transactions.
• Capital Markets: Markets where financial securities are traded, such as stocks and bonds.
• Cost of Capital: The rate of return a company must earn on an investment to satisfy its investors.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept.
• Private Equity: Investment funds that are not traded on public exchanges and typically invest in private companies or engage in buyouts of public companies.
• MAG 7 Stocks: A group of seven large-cap technology companies that have significantly driven market performance.
• Market Cap (Market Capitalization): The total value of a company's outstanding shares of stock.
• Equal-Weighted vs. Market-Cap-Weighted Indices: Different methods of constructing stock market indices. Equal-weighted indices give each stock the same influence, while market-cap-weighted indices give larger companies more influence.
• Gold Market: The market for trading gold, influenced by factors like central bank demand, speculative trading, and investor sentiment.
• Central Banks: Institutions responsible for managing a state's currency, money supply, and interest rates.
• Quantitative Tightening (QT): A monetary policy tool where a central bank reduces the size of its balance sheet by selling assets or allowing them to mature without reinvestment.
• Fed Funds Rate: The target interest rate set by the Federal Reserve for overnight lending between banks.
• SNAP (Supplemental Nutrition Assistance Program): A federal program that provides food assistance to low-income individuals and families.
• EBT (Electronic Benefits Transfer) Cards: Cards used to receive and redeem SNAP benefits.

Mergers and Acquisitions (M&A) Outlook

State of Dealmaking in 2025

• Q3 2025 Rebound: The first half of 2025 experienced a volatile M&A market, described as "up and down, a little bit like the Swiss Alps." However, Q3 showed a significant return of the M&A market.
• Volume and Value Growth:
  • Deal volume is up approximately 9% year-over-year.
  • Deal value has increased by approximately 36% year-over-year.
• Drivers of the Uptick:
  • Moderated Confidence: Increased confidence in the M&A market among investors and corporations.
  • Strong Capital Markets: The S&P 500 is projected to end the year at its highest level since 2009, indicating robust capital markets.
  • Decreasing Cost of Capital: Expectations of a 100 basis point decrease in the cost of capital over the next 12 months.
  • M&A-Friendly Regulatory Environment: A perception that regulatory bodies are more amenable to M&A deals compared to the previous administration.
• Tempering Factors:
  • Rising unemployment rate.
  • Moderate GDP growth projected at around 2% over the next two years.

Key Sectors for M&A Activity

• Technology: Dominates M&A, accounting for about a third of all deals.
• Oil and Gas: The second most active sector.
• Life Sciences: Ranks third in M&A activity.

Dealmaking Trends Through 2026

• Rising Deal Volumes: The "deal barometer" suggests continued growth in deal volumes through 2026.
• Sustained Confidence: Continued moderated confidence is driving this trend, with companies becoming more comfortable presenting deals to their boards.
• Increased Tax-Free Spins: Tax-free spins, a type of corporate restructuring, are expected to reach 12-14 significant deals in 2025, up from 6-7 in the previous year. This indicates boards are more comfortable executing large transactions.
• Narrowing Bid-Ask Gap:
  • Reason for Narrowing: Increased pragmatism in deal valuations.
  • Private Equity Influence: Private equity firms, having held assets longer than the typical 3-5 year period, are motivated to divest due to sitting on significant "dry powder" (uninvested capital). This leads them to lower their selling prices.
  • Cost of Capital Impact: The decreasing cost of capital allows buyers to afford higher valuations, further narrowing the gap.

Policy and Economic Influences on Dealmaking

• Policy Questions: Trade, tariffs, and election year politics are significant considerations for CEOs and CFOs.
• Volatility Integration: Companies are building volatility into deal valuations to account for potential impacts of tariffs and political uncertainty.
• Fed and Rate Cuts:
  • Market participants are comfortable with the expectation of approximately 100 basis points in rate cuts over the next 12 months.
  • This expectation has already been factored into the cost of capital and deal pricing.

Future Dealmaking Projections (2026)

• Modest Growth: An estimated 3% increase in overall dealmaking year-over-year.
• Private Equity Dominance: Private equity is expected to drive a larger portion of this growth, with an anticipated 5% increase in their deal activity, compared to about 3% for corporate M&A.
• Continued Tech Sector Strength: Technology is expected to remain a primary target for M&A due to:
  • Tech for Tech: Consolidation within the tech sector, particularly around AI, cloud, and infrastructure.
  • Non-Tech Buying Tech: Companies in sectors like life sciences, retail, and consumer goods are actively acquiring technology companies.

Regulatory Landscape

• Shifting Perceptions: While initial expectations were for a more deal-friendly regulatory environment under the current administration, the FTC and DOJ have not been as accommodating as anticipated.
• Navigating Regulations: Despite regulatory scrutiny, the overall positive economic factors (strong capital markets, decreasing cost of capital) are creating a favorable deal environment.

Market Trends and Stock Performance

Wall Street Performance and MAG 7 Dominance

• Record Highs: Major indices, including the Dow, S&P 500, and NASDAQ, have been hitting fresh record highs.
• MAG 7 Influence: The "MAG 7" stocks (Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, Tesla) have been the primary drivers of this market rally.
• Nvidia's Ascent: Nvidia is nearing a $5 trillion market capitalization, with its market cap at approximately $4.894 trillion.
• Apple's Performance: Apple also reached another record high.
• Intraday Record Highs: Four of the MAG 7 stocks hit intraday record highs on a recent trading day.
• Concentrated Market: The market is characterized by a widening gulf between the performance of large-cap stocks and smaller-cap stocks, indicating a more concentrated rally.

Semiconductor Sector Performance

• Mixed Results: While Nvidia and other major chip stocks performed strongly, the broader semiconductor sector showed more red than green on a particular day, suggesting a divergence in performance within the industry.

The "Big Beat Small" Trend

• Market Action: The current market trend favors larger companies over smaller ones, as evidenced by the divergence between market-cap-weighted and equal-weighted S&P 500 indices.
• S&P 500 (Market-Cap-Weighted): Up 17% year-to-date.
• S&P 500 (Equal-Weighted): Shows a significant divergence, indicating a lack of broad participation.
• Russell 2000 and S&P 600: These small-cap indices were down on a particular day, highlighting the underperformance of smaller companies.
• Concern for Sustainability: The concentration of gains in a few large names raises questions about the sustainability of the rally if these leaders falter.

Gold Market Dynamics

Recent Gold Price Action

• Gold Cracks $4,000: Gold prices have surpassed the $4,000 mark.
• Metal Complex Correction: After reaching all-time highs, the broader metal complex has experienced a correction.
• Palladium's Decline: Palladium, which was previously sky-high, has seen a significant year-to-date decline, though it remains up 12.7% over the prior month.
• Gold's "Blip": While gold's recent dip appears small in the long term, it's concerning given the heavily leveraged nature of futures contracts.

Drivers of Gold Prices

• Central Bank Demand: Central banks have been the primary drivers of gold's surge over the last decade (up 237% since 2015).
  • Key Buyers: China and Russia have been prominent buyers, with Poland being the top buyer last year.
  • De-Dollarization Trend: Central bank purchases are linked to the trend of de-dollarization.
• ETF-Induced Speculative Mania: Investor interest in gold ETFs and physical gold has also contributed to price increases.
• Sustainability Concerns: The parabolic rise in gold prices may not be sustainable without continued interest from ETF buyers and central banks.
• Lack of Transparency: Central bank purchases are often made discreetly, making it difficult to track their activity in real-time.

Federal Reserve and Economic Outlook

Fed's Upcoming Announcement

• Anticipation of Rate Cuts: The market is anticipating the Fed's rate decision, with expectations of approximately 100 basis points in rate cuts over the next 12 months.
• 13-Week T-Bill Yield: The 13-week T-bill yield is being closely watched as it closely correlates with the Fed's preferred benchmark rate (the Fed Funds Rate).
• Fed Funds Rate: Currently above 4%, with a target range of 4% to 4.25%.
• Market Pricing In Rate Cuts: The market is already pricing in rate cuts, with the Fed Funds Rate potentially falling below the current target range.

Concerns Regarding Fed Policy

• Fed Behind the Eight-Ball: A concern is that the Fed might be cutting rates reactively to prevent a recession, which could indicate it's already too late to avoid economic downturn.
• Economic Razor's Edge: The economy is described as being "on the razor's edge."
• Labor Market Uncertainty: A lack of clear data on the labor market's strength or weakness adds to the uncertainty.
• Fed Cuts Not Always Good News: The takeaway is that Fed rate cuts are not always a positive indicator and can signal underlying economic weakness.

SNAP Benefits and Potential Cuts

Looming Deadline and Impact

• November 1st Deadline: Funding for SNAP benefits could run out on November 1st if Congress does not act.
• Mechanical Impact:
  • October benefits have already been loaded onto EBT cards, but many participants have already exhausted them.
  • The critical issue is that no new benefits will be loaded for November.
• Financial Impact:
  • In Michigan, SNAP-participating families could lose an average of $335.
  • Nationwide, approximately $8 billion in benefits would be lost.

Scope of Impact

• 42 Million Americans: Approximately 42 million Americans, or about 12% of the population, rely on SNAP benefits.
• Demographics of SNAP Recipients:
  • Low-income individuals and families.
  • The majority are seniors or families with children.
  • Able-bodied recipients are required to work to receive benefits.
  • Recipients who are not working may have disabilities or be caring for disabled children.

Public Health and Long-Term Economic Effects

• Acute Health Impacts:
  • Reliance on lower-quality, less healthy food items.
  • Increased hospitalizations, particularly for individuals with diabetes, when SNAP benefits run out.
• Impact on Children:
  • Hunger affects concentration and learning in school, impacting not only the affected children but also their classmates.
• Long-Term Economic Consequences:
  • Families will face difficult decisions about spending, potentially leading to unpaid rent, delayed car repairs, or disconnected cell phones.
  • Increased risk of eviction and unemployment.
  • The impact can affect families' economic health for months or even years.

Alternatives and Limitations

• State and Charitable Gaps:
  • Some states are attempting to cover the gap, but SNAP is a massive federal program ($100 billion annually), making it impossible for states to fully compensate.
  • The charitable food system (food banks and pantries) is also unable to fill the void.
• Overwhelmed Charitable System: Food banks are already experiencing increased demand due to fear of the November deadline and are working at maximum capacity.
• SNAP's Role: SNAP is the largest food assistance program and the most effective tool for addressing food insecurity and reducing poverty.