There's an undeniable enthusiasm on Wall Street: the SpaceX IPO went as smoothly as could have been imagined, the hometown basketball team just won its first title in 53 years, and the stock market is poised to rally thanks to a peace deal that after 40 or so false starts really seems to be happening.
The research service Citrini just authored a note sharing that upbeat undertone. A new Substack post from the Citrini team, led by James van Geelen, says there's a scenario where, in their words, the "market could go absolutely insane," which they quantify by meaning the S&P 500 rising another 10% to 15% and AI names doubling in value. Even without losing sanity, they say the S&P 500 SPX will reach 8,000 before any worries meaningfully threaten the cycle.
They pose the theory that the stock market is vacillating between thematic momentum and macro conditions. Last year, it was tariffs and a growth scare, and this year it was the Iran conflict, that temporarily dislodged the enthusiasm for artificial intelligence.
There's a new macro concern, namely the worry that the Federal Reserve will begin lifting interest rates this year, which really only started getting priced into the futures market in May. There are multiple reasons for the repricing of Fed expectations: the uptick in inflation readings, the strengthening jobs-market data and hawkish central-bank actions.
Now, it appears that the Strait of Hormuz may finally reopen. But that won't be seen in the data right away. "There will still be indirect, lagging inflationary ripple effects on different timeframes. June and July may be hot for reasons that were set in motion before Memorial Day. We are naming this dynamic the Echo Shock: measured inflation peaking just as actual pricing pressure at the source reverses," they say.
Besides the Iran situation, they also point out that there is no evidence of inflationary pressure on wages, as evidenced by real wage growth - that is, wages adjusted for inflation - turning sharply negative. "So far, this remains a strictly supply-driven inflation shock and hence is unlikely to have legs," they say.
The Citrini team also takes aim at the labor market, which, despite strong payrolls data, is not overheating, in their view. Data from the job openings and labor turnover survey, or JOLTS, is not nearly as rosy as the payrolls data suggests, and in any event the current level of job creation isn't excessive by historical standards.
"Macro data is inherently extremely noisy, even without the enormous macroeconomic shocks we've been hit by such as the tariffs from Liberation Day or the Iran war. It has served us well to not over-extrapolate short periods of macro data to draw strong conclusions," they say.
Armed with that perspective, their view is that the Fed, now led by Chair Kevin Warsh, won't do anything - choosing neither to hike nor to immediately shrink the balance sheet. "We think Warsh holds until something in his framework - median and trimmed-mean CPI, with the willingness to underwrite deflationary technology trends - screams higher, and we don't see what that is going to be in the near future," they say.
Tim Duy, the chief U.S. economist at SGH Macro Advisors, agrees that if Warsh sounds dovish at his maiden press conference on Wednesday, stocks will be racing higher.
"Warsh could lean on trimmed mean inflation, lower oil prices, and the promise of AI to strike a decidedly dovish tone and, like Powell, throw Fed hawks under the bus. We don't know how much lower pricing for the December meeting can fall given that the data still favors more risk of rate hikes than cuts, but we are confident that risk assets can jump higher," says Duy.
Duy, it should be noted, doesn't share the Citrini dovish take on the Fed. He assigns a 70% chance to a Fed hike in September - the market probability is more like one in four - as he says core nonhousing services inflation is a major red flag that above-target inflation has become embedded.