Despite Economic Green Shoots, Stocks Remain Vulnerable | Michael Kantrowitz

**Michael Kantrowitz** (0:01)
From a cyclical hope perspective, it looks like we're going to see housing kind of bounce around as a reflection of what rates do. I think PMIs are going to improve, which all S-equals should keep interest rates elevated on the long end.
Profit breadth should improve on the back of rising PMIs. Those go very much hand in hand. And I think employment is probably at least for now, plateaued at the current level of unemployment. Could we see a weak data month? Sure. Could we see a strong data month? Yeah. But I think we're stabilizing and it kind of follows suit. And there's a lot of unknowns which could change the path. And like the Fed, we're going to have to be a little data dependent still. From my lens, there's not a lot of risk priced into markets. And what that means, at best, multiples could stay high but are going to be a lot more volatile going forward.

**Adam Taggart** (1:08)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Today's guest is best known for his HOPE framework, a highly effective way to measure the health of the economy and to tell whether it's getting stronger or weaker. Well, as we begin a new year with record housing and affordability, trade wars and a cooling jobs market, what does this framework tell us is in store for 2025? To find out, we've got the good fortune to speak today with Michael Kantrowitz, chief investment strategist and managing director at Piper Sandler. He's also recently launched a new podcast titled What's Next for Markets. Michael, it's great to see you again. Thanks so much for joining us today.

**Michael Kantrowitz** (1:45)
Good to see you, Adam, and thanks again for having me on.

**Adam Taggart** (1:48)
Hey, it's always a pleasure, my friend. Look, I've been having a lot of people, really, the past couple months, say, get Kantrowitz on. Got to find out what's going on with the HOPE framework, especially as we're coming into this new year. A new year is categorized by super high valuations in stocks, at least, a lot of change and uncertainty with the new administration. I mentioned in the intro here, record housing and affordability. Trump is sending three to 10 curveballs out a day, spinning heads about what might happen with the economy, with tariffs, etc.
And the jobs market, Jerome Powell would say it's been normalizing. Some other people would say it's cooling. I know these are all factors that go into your HOPE framework. So super excited to get the latest update on what your framework is telling us. Real quickly, before we get to that, if we can just kick things off with a general question, I'd like to ask you at the start here. What's your current assessment of the global economy and financial markets?

**Michael Kantrowitz** (2:53)
Sure. I think the global economy still remains uncertain. Given all those things you just mentioned. But certainly in many of the developed economies, I think we're starting to see some stabilization in pockets that have been weak for the last several years, most visibly in the United States. And I think between the outcome of the election, the Fed cutting rates 100 basis points, there's some sense of renewed optimism. And when we look at the global backdrop or the US backdrop, I would say that we've been in a very bifurcated macro economy and bifurcated market backdrop for the last several years. And I think that in 2025, the weak part of that bifurcation will hopefully start to heal somewhat and improve, and that we should see somewhat better breadth around the global economy and certainly within the US economy, and unlikely to see a market that's just led by seven stocks this year.

**Adam Taggart** (4:01)
Okay. So I want to give you kudos that you have this term of bifurcation. You've been beating that drum for a good while. I think that really has been a very major theme. I think it's in many ways a theme that perhaps carried Trump into office with the majority of the popular vote that he had, because the bottom part of the K in this K-shape recovery or bifurcated recovery we've been having, there's a lot of anger and frustration in that bottom part of the K, which I think we could maybe safely say is 80 to 90 percent, sadly, of the public. So what makes you think that the weak part of that bifurcation is going to start improving this year? What's giving you optimism there?

**Michael Kantrowitz** (4:47)
Yeah. Well, when thinking of catalysts, I always start off with, well, what was the catalyst to make those weak parts of the economy weak? And therefore understand, well, okay, this was the problem, and then ask ourselves, is that problem starting to resolve itself? So I think, you know, when the last couple of years, there's been a lot of debates around whether the economy is rate-sensitive or not. And the Fed's rate-tightening cycle certainly slowed many parts of the economy down a lot, but didn't really have a very clear negative impact on the broad economy. But I think, again, that's the difference between looking at something like GDP overall, or the S&P 500 overall, versus looking at underneath the surface of the parts. So everyone knows the market's been very bifurcated, and the MAG 7 have been leading the charge, and that's largely been because earnings growth outside of the MAG 7 have been quite weak. And then when we look from a macro perspective, the services part of the US economy has been holding things up while the manufacturing part of our economy has been in contraction for the last two years or so. And we also saw a similar type of weakness in small business activity and small cap earnings. We've had three years of consecutive, or back to back to back declines in earnings. So why has that been the case? Well, I think, yeah, the Fed raised rates pretty sharply, price levels picked up, and essentially, those companies, consumers that were paying higher interest expense really bore the brunt of that. And those companies and consumers that didn't have as much, let's say, operating leverage or economies of scale, similarly kind of paid the price of that. And so now we have the 100 basis points, lower fed funds rate, commodity prices have been fairly weak, the market's up a lot, home prices are up a lot. And so I think those parts of the economy that struggled from the fed tightening will in kind start to improve from the 100 basis points of rate cuts we've seen.