In May, the American stock market, particularly the S&P 500 index, did not show signs of correction and returned to its highs, surprising many with its strength despite the absence of anticipated rate cuts from the Fed. Traders seem to be pricing in a robust U.S. economy, as evidenced by strong earnings in the last quarter, creating a "Goldilocks economy" amidst higher inflation. However, some major fund managers disagree, predicting a cooling of key economic indicators in the coming months.
Support for this caution comes from recent conference calls where many company managers indicated future cost cuts to maintain profit margins, which will likely impact the labor market and, in turn, consumer strength. This could disrupt the cycle of a strong labor market, high consumption, and profits that has been boosting stock markets.
Despite emerging negative signals, bad news is often interpreted positively, as it fuels speculation about potential Fed rate cuts. Notably, Warren Buffett's company has reached a record high in cash holdings, while average American fund managers are at their lowest, a pattern that historically precedes market corrections.
The author maintains an agnostic stance toward stock indices, observing their strength while considering potential protections. They note that when the yield on the U.S. 10-year Treasury exceeds 4.6%, the S&P 500 shows signs of anxiety, indicating that inflation remains a significant risk. Additionally, soaring commodity prices could disrupt the correlation between equities and bonds, leaving uncertainty about whether Buffett's strategy will prove correct.
