Weekly Research Briefing: Niagara Falls
If the news flow was a drop of water then this week we would be looking at a raging waterfall. Even more appropriate then that we came across this shot of the largest volume waterfall in the Americas which sits on the American/Canadian border. For most of us who live in the states, the tariff decision between the two countries needs to be reached this week as it will affect our future cost of cars/trucks, electricity and maple syrup. But this major item is only one piece of news that we will hear about this week.
It was already a big one for Japan last week and the EU on Sunday as an agreement for a 15% US import tariff rate was reached. This compares to 10% in the UK and 50% for Brazil. 15% for the EU/Japan is good news for Wall Street because it is better than the feared 25-30% rates that were being targeted. This is still tough news for Main Street USA because the tariffs are a consumption tax that will be paid for by US businesses and consumers. 15% is hopeful news for Canada and Mexico because the North American auto industry would break if Japan, Europe and the UK had lower tariffs than their 25% rate. I would expect a CAN/MX deal to be at a 10-15% tariff rate this week. Still a big slate of trade deals to get done before the tariff rates jump up on Friday. A China trade agreement is being worked on as I type and South Korea is also closely being discussed.
So how will the trade wars of 2025 shake out? It looks like a 15% rate will be the price for foreign goods sold in the US. Some foreign manufacturing companies will be fine sending goods into America with the higher prices attached while other manufacturers will shift goods away to sell into other markets. US consumer spending will likely slow, while in the near term cost increases of foreign-made goods and commodities runs through their shopping basket and we all have less money to spend. Will Americans buy fewer bunches of bananas, cups of coffee and bars of European chocolate? Probably. Will the increased tariff taxes become a tightening on the US economy which will lead to eventual deflation as too few dollars are chasing too many goods? Too early to tell. Expect many moving pieces as trade routes re-adjust to the new US tariff rates. Some brand names and businesses in the US will disappear while new ones will emerge. We all hope that any increase in trade certainty will now allow businesses to make capex and hiring plans for the future and erase the uncertainty that has existed since March.
Away from tariff news, there is plenty else on this week's docket. The Bank of Japan, Bank of Canada & US FOMC will meet and the consensus in the markets is for a stay on rates for all three central banks. Even with President Trump's ongoing pressure on the Fed and Chairman Jerome Powell, the market expects a lively discussion at the FOMC this week followed by 1-2 Fed Fund rate cuts before year end. And down the street at the US Treasury, the decision makers will announce their plans for the funding future of our growing US deficits. More bills? More bonds? Something new or different?
A very big week in economic data week with the jobs/employment figures hitting: ADP on Wednesday and non-farm payrolls on Friday. Both forecasts are looking for a near +100,000 print. Also, the early read on Q2 GDP will hit on Wednesday along with personal income/spending and the PCE price indexes on Thursday. And not to be forgotten is that nearly 40% of the S&P 500 will report earnings this week, including four of the trillion dollar plus market caps: Amazon, Apple, Microsoft and Meta. So buckle up and we will see you on the other side of the waterfall. Stay cool out there and have a great week.
This chart is from last week but reflects the mid-teens effective tariff rate that the White House seems to be comfortable with given the 15% EU rate…
One has to think that Canada, Mexico and South Korea will also end up with a 15% rate this week.
@carlquintanilla.bsky.social: JPMORGAN: “.. Even with these various deals either inked or getting closer, we still think we are on track for an average effective tariff rate somewhere in the very high teens. This wouldn’t be much lower than the immediate post-Liberation Day tariffs that were the cause of so much market angst.”
China aside, Canada, Mexico and South Korea tariff rates are the critical ones to watch this week…
But really, no one wants to be stuck with a rate above 20% or they could lose manufacturing to the other countries in the world.
@KevRGordon
Time to bring on the tariff certainty so that companies can begin to confidently spend again…
@TheTranscript_: "Now pharma companies have to ask themselves the critical question as to where they're going to build that new capacity. And of course, that's hard to do if you don't know yet what the tariff situation ultimately plays out to be." (Danaher Corporation CEO)
The Fifth Federal Reserve district is not the biggest in terms of manufacturing, but tariff certainty can only help the depressed outlook for the companies that make cars, furniture and planes in their states…
@LizAnnSonders: 6m outlook for capex fell to a new cycle low in July per Richmond Fed Manufacturing Index … year/year trend (orange) has deteriorated sharply
Tariff certainty will certainly fire up the capital markets once participants return from their August vacations…
@knowledge_vital: "We’re feeling pretty positive about what’s going to happen post-Labor Day due to the combination of equity markets recovering and debt markets recovering as people feel more confident about where the tariffs will ultimately settle" - BX's Jonathan Gray in the FT
But Alcoa reminded us that while the tariff wars might be winding down on countries, they are still a thorn for the individual commodity inputs into manufacturing…
@TheTranscript_: Alcoa CEO: "Our customers are paying significantly higher prices for aluminum in the United States than they would pay anywhere else in the world." $AA
In other words, US core capital goods are running flat in volume terms…
Hopefully trade certainty will allow US manufacturing volumes to go positive in the future.
@RenMacLLC: So far this year, nondefense capital goods excluding aircraft have advanced 4% at an annual rate. Prices for capital equipment have increased 4% at an annual rate.
US economic surprise index has flatlined as trade uncertainties languished. Time for a meaningful move higher?
@neilksethi: With the mixed data last week, the Citi Economic Surprise Index fell back from the best levels since May -9.1pts to 3.5. The highs of the year were 22.5 in mid-Jan. The 2024 high was 47.2 (in Feb) and the low -47.5 (in July).
Along with the lack of economic direction, US interest rates have also been undecided and languished toward their own flatline…
Interest in corporate credit remains extremely aggressive giving companies the financial capacity to do most anything…
@lisaabramowicz1: Spreads on IG corporate bonds are near the tightest levels since the late 1990s. "The theoretical minimum spread is lower today. High-quality corporate credit can now trade closer to, or in some cases even through, US Treasuries in a way that was not previously conceivable:" Citi
Goldman Sachs notes that investor animal spirits are running wild in the markets…
Following past spikes in speculative activity, the market tends to outperform in the 3, 6 and 12 month windows but then underperform in the 24 and 36 month timeframes.
Our Speculative Trading Indicator has increased sharply during the last few months. The indicator now sits at its highest level on record outside of 1998-2001 and 2020-2021. The rise in the indicator reflects the elevated recent share of trading volumes in unprofitable stocks, penny stocks, and stocks with elevated EV/sales multiples. The most actively traded stocks include most of the Mag 7 along with companies involved in digital assets and quantum computing.
The increase in the Speculative Trading Indicator mirrors other signs of increased risk appetite within the equity market. Call options have recently accounted for 61% of option volumes, the highest share since 2021. First-day IPO returns have ballooned, and the $9 billion of SPAC issuance in 2Q 2025 represented the most active quarter since 1Q 2022. A basket of stocks popular with retail traders (GSXURFAV) has rallied by 50% since early April.
Goldman Sachs
What could possibly go wrong?
Individual investors are not the only ones jumping into the speculative end of the investing market. So are individual companies. Gregory Zuckerman writes this one.
It’s the hottest trade of the summer.
Companies are raising tens of billions of dollars, not to invest in their businesses or hire employees, but to purchase bitcoin and more obscure cryptocurrencies. A Japanese hotel operator, a French semiconductor manufacturer, a Florida toy maker, a nail-salon chain, an electric-bike maker—they’re all plowing cash into tokens, helping to send all kinds of digital currencies to record levels. News that a new company plans to buy crypto is enough to send its shares flying—spurring others to consider joining the frenzy.
Since June 1, 98 companies have announced plans to raise over $43 billion to buy bitcoin and other cryptocurrencies, according to Architect Partners, a crypto advisory firm. Nearly $86 billion has been raised for this purpose since the start of the year. That’s more than double the amount of money raised in initial public offerings in the U.S. in 2025, according to Dealogic.
Skeptics say the rush of companies buying crypto is a sign the market is overheating, noting that digital tokens, especially the obscure ones, are notoriously volatile and have uncertain futures. They scratch their heads about why an investor would buy shares of a company purchasing cryptocurrencies when they can buy them on their own through low-cost exchange-traded funds and other vehicles.
Even see here where one ball is not bouncing like the others…
From the April low, Small, Mid and Large Cap stocks have bounced 26-28% together like equally made tennis balls. But then there are the Micro Cap stocks (market caps < $300 million) which have rebounded by 38%. Be careful trying to short speculative stocks during a time like this. The environments can always last longer than you think.
With 3 weeks of earnings on the tape, the numbers are coming in better than in the past…
Remember that we talked about the earnings bar being very low due to estimates being marked down after April's tariff uncertainty.
BofA Global: 168 S&P 500 companies (40% of index earnings) have now reported. The breadth of beats remained strong with 72% of companies beating on EPS, 77% on revenue, and 60% on both – all of these stats are better than the post week-2 historical average of 64%/59%/45%.
BofA Global
But where the earnings bar was low, the S&P 500 also rebounded 15-20% going into the earnings season so the market expected numbers to beat…
As a result, stocks didn't get paid for beating numbers this month. But if you missed your numbers, good-bye.
@KevRGordon: On average, S&P 500 companies that are missing on EPS this season are underperforming the index by nearly 5% the day they report ... so far, that's the worst spread in the history of the data per Bloomberg Intelligence
This week is the pinnacle of earnings for the S&P 500…
@eWhispers
If you invest in cloud and AI spending, then Google's earnings release was music to your ears…
"Given the strong demand for our cloud products and services, we now expect to invest approximately $85 billion in CapEx in 2025, up from a previous estimate of $75 billion. Our updated outlook reflects additional investment in servers, the timing of delivery of servers and an acceleration in the pace of data center construction, primarily to meet cloud customer demand. Looking out to 2026, we expect a further increase in CapEx due to the demand we're seeing from customers as well as growth opportunities across the company." - CFO Anat Ashkenazi
Meanwhile, the #1 seller of the picks and shovels to the AI industry thinks that the compensation for elite AI researchers is probably rational…
"The big idea, though, is that you're highlighting is that the impact of a 150 or so AI researchers can probably create with enough funding behind them, create an OpenAI....DeepSeek is 150 people. Moonshot is 150 people. And look at the original OpenAI was about 150 people. DeepMind, and they're all about that size. I think there's something about the elegance of small teams and that's not a small team. That's a good-sized team with the right infrastructure. And so that kind of tells you something. 150 people, if you're willing to pay say $20 billion, $30 billion to buy a startup with 150 AI researchers, why wouldn't you pay one" - Nvidia CEO Jensen Huang
Last week, Microsoft announced a 9,000 person headcount reduction. This during a time while the business is absolutely flying…
Satya tries to explain why in this letter to his employees which is an important read for all of us.
I also want to acknowledge the uncertainty and seeming incongruence of the times we’re in. By every objective measure, Microsoft is thriving—our market performance, strategic positioning, and growth all point up and to the right. We’re investing more in CapEx than ever before. Our overall headcount is relatively unchanged, and some of the talent and expertise in our industry and at Microsoft is being recognized and rewarded at levels never seen before. And yet, at the same time, we’ve undergone layoffs.
This is the enigma of success in an industry that has no franchise value. Progress isn’t linear. It’s dynamic, sometimes dissonant, and always demanding. But it’s also a new opportunity for us to shape, lead through, and have greater impact than ever before.
The success we want to achieve will be defined by our ability to go through this difficult process of “unlearning” and “learning.” It requires us to meet changing customer needs, by continuing to maintain and scale our current business, while also creating new categories with new business models and a new production function. This is inherently hard, and few companies can do both.
Om Malik shares his thoughts on the letter which will also get you thinking about the impact of AI…
Microsoft’s leader is essentially saying they laid off employees not due to financial struggles, but because those workers didn’t fit into the company’s AI-focused strategy. The repeated mentions of “unlearning” and “learning” suggest that some employees’ skills have become outdated. Rather than invest in retraining, the company opted to hire fewer workers with more relevant expertise.
When Nadella uses the phrase “learning,” it isn’t inspirational. It’s a warning disguised as motivation. This harsh reality will confront many employees.
Like I said at the start, this is not just about Microsoft, but pretty much every software company will be hit hard by this wave of transformation. If you’re an employee at Microsoft (or any other software company), the reality is that you’re only valuable if you have perceived value in the company’s AI transformation. In other words, adapt, and adapt quickly. Because if you don’t, well, you’re on your own.
Las Vegas is slowing down more than the normal hot summer seasonal slowdown…
The Wall Street Journal goes to Vegas to check on how good no tax on tips can be in an environment of fewer tippers…
Visits are down this year, reflecting uncertainty in the U.S. economy, the sting of inflation and fewer Canadian travelers. On the Strip and in the downtown casino district, bartenders, showgirls and blackjack dealers say their tip income has shriveled since last year, in some cases by more than half.
Congress gave Las Vegas a much-needed boost earlier this month when it exempted up to $25,000 in tips a year from personal income taxes. While workers here are happy about the move, they say it doesn’t make up for falling incomes.
“No tax on tips, that’s a rad thing. But it doesn’t really do us much good if there isn’t any people to get tips from,” said Charlie Mungo, 36 years old, a tattoo artist in downtown Las Vegas who counts on tips to supplement his income.
In boom years for Vegas after the Covid-19 pandemic, Mungo said he earned between $3,000 and $6,000 a month including tips and regular pay inking tourists with little souvenir tattoos such as a pair of dice. Recently he estimates he has made only about $1,500 a month. Canadians, who Mungo previously counted as about 30% of his customers, are now rare…
Visits to Vegas in the first five months of the year were down 6.5% compared with the same period last year, the Las Vegas Convention and Visitors Authority said. Foot traffic on the Strip is also lower, according to phone-tracking data from Placer.ai. Hotel occupancy fell by 14.6% in June compared with June 2024 and revenue per available hotel room fell by 19.2%, according to data from CoStar.
Not just Las Vegas, but the lines at Chipotle are also disappearing…
Chipotle Mexican Grill Inc. shares plunged after cutting its annual outlook for the second time this year, suggesting that honey chicken and burrito giveaways haven’t been enough to offset a traffic slump that the company attributed to economic anxiety.
Sales at established restaurants are now expected to be about flat for the full year, the company said Wednesday. It previously forecast the metric would expand by a low-single digit…
Chipotle had already cut its annual guidance earlier this year after economic uncertainty, among other factors, dinged results.
The Mexican-inspired chain has deployed a wide range of tactics to reel customers in, including a limited-time honey chicken launch, an adobo ranch sauce and free food. But transactions still fell, driving a comparable sales decline of 4% in the quarter ended June 30, a steeper drop than analysts had been expecting…
“That lower-income consumer is under pressure,” he said, looking for value and “disregarding things like quality, fresh, abundance” — which are Chipotle’s key selling points.
The quarterly comparable sales drop was Chipotle’s second in a row, a rare showing for a company that had continued to grow even as budget-conscious consumers cut back at competitors.
Maybe related to Vegas and Chipotle is the shrinkage in new credit cards being given out by the top banks…
Lenders opened fewer cards in the second quarter, according to earnings reports from major issuers. They raised qualification requirements for lower-end customers that tend to be at greater risk of missing payments…
But more banks have raised the bar for credit-card approvals this year than lowered it, reflecting growing caution, according to the Federal Reserve’s Senior Loan Officer Survey.
Total new credit-card openings across four major lenders fell 5% in the second quarter, marking the first decline in more than a year…
Lower-end consumers, meanwhile, are struggling to keep up: Card balances are rising—a sign that many households are spending beyond their means. Those balances also have been getting more expensive this year. The average interest rate on credit cards rose to 24.35% this month, according to LendingTree.
So far, delinquencies have remained steady. The economy hasn’t been derailed by trade tensions and growing concerns about the job market. But banks remain wary.
Saying goodbye to an old friend…
Back before the internet, when content was distributed over the air, through cable pipes and on movie screens, Viacom was a big winner for many of us in the world of public equities. But once the internet and wireless broadband took off at the turn of this century, Viacom/Paramount could not find its way even with the help of Ethan Hunt and SpongeBob. With the FCC now approving the merger, Viacom will disappear from the stock tables anytime in the next two months. Let's see if its future as a private company generates a better return for its new investors than it did as a public company.
YCharts
As public companies disappear from the stock tables, there is an increase in research being done on private companies…
The convergence of private and public markets continues with UBS, J.P. Morgan and now Citigroup moving to follow and research the fastest growing companies in the economy. Expect this trend to continue as investors increase their ownership of private companies and private companies want access to capital away from the public markets.
Citigroup Inc. is expanding its research on private companies, joining rivals including JPMorgan Chase & Co. in covering firms that aren’t publicly traded.
Heath Terry, who has worked at Goldman Sachs Group Inc., Third Point and Balyasny Asset Management, joined Citigroup to lead coverage of the heavily private artificial-intelligence sector and guide other analysts in their research on private firms in their own industries.
Closely held firms, which have proliferated as the number of public companies globally has declined, are dominating increasingly important sectors such as AI and aerospace. That shift has made financial data in global markets less transparent and increased attention on venture capital and private equity firms.
“This is one of — if not the single biggest — structural change in our markets over the last 10, 15 years,” Terry, Citigroup’s global head of technology and communications research, said in an interview. “This is just table stakes of being a research analyst in 2025.”…
“The number of VC- and PE-backed companies is up massively compared to what’s in the public arena,” said Citigroup research head Lucy Baldwin, who hired Terry. The firm will look to analyze “how different profit pools will be disrupted and which companies will win or lose — whether that’s private or public.”
Speaking of Private Market opportunities…
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DISCLOSURES
The author has current equity ownership in: Nvidia Corp.
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