March third, twenty twenty-five to March fourth, twenty twenty-five

I. Foundation

resistance to change and hence greater dependability for the results shown in the past.

II. Insights

Our Viewpoints and ideas on market.

The reasons behind falling interest rates are crucial

Policy uncertainty, the lagged effects of high interest rates, and persistently elevated consumer prices are further weighing on US market sentiment. Meanwhile, resistance at 6,100 remains very strong, keeping markets choppy at the start of the year.

The latest consumer data and individual investor sentiment indexes also reflect the impact of these factors.

These multiple factors have also changed the correlation structure between interest rates and stocks—as the 10-year Treasury yield has stabilized below 4.50%, the US equity market has become somewhat less sensitive to interest rates. In other words, because The main reason yields are falling now is that growth expectations are weakening, so lower interest rates are boosting stock-market returns less than they were a few weeks ago.

This means that, At present, economic growth and corporate earnings growth are the key variables driving equity-index performance.

Further reading: Notes 250109 Stocks and interest rates: the paradigm logic behind the Treasury ten-year range and changes in stock-bond relationships

2025.03.03

The Fed will take a cautious, dovish path & the characteristics of this round of expectations data

US consumer expectations have declined in both the University of Michigan and Conference Board surveys, In fact, this consumer-expectations data are usually quite volatile and tend to follow, rather than lead, consumer spending.

What is truly worth noting is that both surveys show a significant recent rise in inflation expectations, This change did not occur during the trade shocks of 2018-19, but it was a feature of the pandemic recovery in 2021-23.The rise in expectations in 21-23 played a role in the Fed’s rate-hiking cycle, contributing to the faster pace of rate hikes in the second half of 2022.

Tariffs will keep US inflation near 3% and make the Fed cautious about considering further rate cuts. However, with a stronger dollar and slower wage growth, the risk of a sharp acceleration in US inflation (above 3.5%) remains low.

The Fed will also show greater sensitivity to downside growth risks. Although weak labor demand is not part of the current forecast, if the Fed sees a substantial threat to economic expansion, it will not hesitate to cut rates while inflation remains high.The US 2-year real yield has fallen 45 basis points this month, reaching its lowest level since 2022 8, even as consumer inflation expectations have risen, but the market has begun pricing in expansion risks.

2025.03.03

European markets vs. the US: pricing fiscal expansion & fiscal contraction

What we discussed on the Planet is steadily becoming reality: European defense stocks have surged by double digits, lifting the broader market, This is essentially a direct reflection of the expansion of fiscal space. One could say that the core logic behind the entire European market rally since 11 of last year has been a reassessment of Europe’s capacity and need to spend.

The US decision last night to cut financial support for Ukraine will only accelerate this discussion, and the defense sector will very likely open higher again today. Against this backdrop, some very large funding figures are sure to be floated.

Major European powers are taking further steps to try to seize more than 2000 billion euros in frozen Russian assets, while also drafting a plan for a ceasefire agreement in Ukraine” (see today’s FT news).

https://www.ft.com/content/6536f4c4-42ce-4d8e-a063-5b7f708e7303

However, the market may be getting ahead of itself on the scale and feasibility of this plan. Many broader European fiscal-spending plans or new funds require unanimous approval from all EU member states, a very high bar, especially given Hungary and Slovakia.

However, the rationale for European markets to outperform remains valid as long as the US still cannot offer attractive opportunities for future returns(Mag 7 is now becoming a capex machine rather than a buyback machine… One market is pricing in fiscal expansion, while the other is pricing in fiscal contraction; the outcome is easy to imagine.

Valuation multiples in the former will surely expand, while those in the latter will surely contract.

We have discussed Europe extensively, starting from the beginning of this rally. I will leave out the dates of the further-reading notes here; you can find them by searching the keywords on Planet. Be sure to read this entire section.

2025.03.04

III. Market Pulse

Our latest Comments on the economic and market environment

An overview of Trump’s tariffs so far Trump Tariffs So Far