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Editor’s Note: Below is an interesting inquiry we’ve received numerous times recently in response to the Early Look note titled, “How Did We Get Here?” written by Senior Macro analyst Darius Dale (published on 7/17). Below is Dale’s response (on 7/18), which we think is important perspective for investors. Click here to learn more about the Early Look.

“Is An Earnings Recession Priced In?” - 07.16.2019 Fed cut hibatchi cartoon

Question: “Are stocks and economic data poised to diverge going forward?

Great question – this Early Look note was purposefully inconclusive because the note was intended for readers to contextualize market performance objectively so that we can all get a better sense of what Mr. Market might be pricing in (as opposed to what we want him to price in). My calling out Micron Technology (MU) is me calling a spade a spade, insomuch that flagging the lower-high in the SMH is a calling a spade a spade too. I don’t know the answer to the “Will stocks look through an earnings recession?” question. We’re monitoring this in real-time just like you are.

To be clear, our views on either the Quads or market outlook – which I highlighted at the onset of the note – haven’t changed. If we do see an earnings recession without a commensurate widening of credit spreads, this time will be different, but we’re not in the Dalio “paradigm shift” camp – certainly not on a prospective basis.

KOSPI down on the rate cut news out of the BoK today; JCI flat on BI’s move as well. The MSCI ACWI’s double-top on 7/4, Bitcoin’s peaking on 6/26, and HYG/JNK peaking on 6/20 are all disconfirming of Monday’s ATH in the SPX and suggestive of the view that a mere -25bps cut by the Fed at the end of the month isn’t going to be enough to sustain the liquidity-fueled rally in large-cap US equities.

What if the data keeps slowing from there?

Keep in mind that policy impotence could in fact be the paradigm shift. I’m not saying we’ve reached that point, but I do know that Dailo doesn’t have a crystal ball on decade-long regime change…

“Is An Earnings Recession Priced In?” - dd1

“Is An Earnings Recession Priced In?” - dd2

“Is An Earnings Recession Priced In?” - dd3

“Is An Earnings Recession Priced In?” - early look