“Stocks Are Still Very Undervalued”

Economic Outlook & Fed Policy

• Goldman Sachs expects a 30% probability of a soft patch or recession in H2 2024, though the intermediate trajectory (2025–2026) remains optimistic.
• Q1 2024 GDP recorded a negative print, but Q2 rebounded strongly, leading to increased optimism on the global economy.
• Global growth drivers identified include German defense spending, AI/robotics integration, and fiscal expansion in China.
• U.S. fiscal expansion is projected at 6% for 2024 and 6–7% for 2025, driven by the "Big Beautiful Bill" (tariffs, bonus depreciation, Social Security tax benefits).
• Gold Sachs views the upcoming fiscal contraction via taxes as a one-time price adjustment rather than sustained inflation.
• A divergence exists within the Federal Reserve: Governor Waller and Governor Bowman advocate for immediate rate cuts to preempt tax-driven inflation, whereas Chair Powell prefers a "wait and see" approach to assess cumulative domestic impacts.
• Goldman Sachs predicts a recession is unlikely in H2 2024; the economy will "muddle through" with Capex rising in Q4 2025 due to deregulation, particularly in banking.
• Forward-looking statement: If the Fed does not cut rates in the next few months, the probability of cuts in the subsequent six months drops significantly.

Market Reactions & Currency Dynamics

• Powell's recent speech marked a phase shift in the currency market, halting a dollar downswing that began in late February and weakening the euro and other currencies.
• Market pricing currently includes too many rate cuts by the end of 2026; Goldman Sachs expects the Fed to cut very few times.
• A credit boom is anticipated to drive mortgage origination, higher home prices, and ultimately an updraft in inflation by mid-2025.
• Currency trends are influenced by cross-currents: a potential strong dollar from Fed policy vs. a weakening dollar from credit expansion vs. dollar demand from AI/robotics investments.
• ECB rate cuts are partially predicated on Fed easing; a Fed hold may reverse the trend of dollar weakness.
• Investment in U.S. stocks requires holding dollars, creating structural support for the currency despite potential Fed rate cuts.

Investment Strategy & Trades

• Top Trade: Long U.S. stocks, citing undervaluation despite high P/E ratios, driven by top-down fiscal debasement and productive credit deployment.
• Macro Trades: Long dollar, long carry, long mortgage basis, and long U.S. Treasuries via asset swaps.
• Hedging: Short options on rates to capitalize on the expected stability of rates.
• Valuation Logic: Top-down analysis suggests U.S. stocks should richen by 6–7% annually via currency debasement and AI-driven GDP growth, outweighing bottom-up P/E concerns.
• Earnings Context: Recent earnings reports described as "blockbuster good," reinforcing the AI capex boom's contribution to current GDP.

Seasonal & Operational Risks

• Investors are advised to monitor August, noting a historical tendency for market "wobbles" (e.g., Japan's August 5th wobble in 2023) during low-liquidity summer periods.
• Tariffs are estimated to impose an annualized cost of $250–300 billion (approx. 1% of GDP); absorption by corporations would impact stocks, while absorption by consumers would impact consumption.