Five Charts That Highlight My Stock Market Conviction

Five Charts That Highlight My Stock Market Conviction

• EIA data shows gas prices have weakened so far in July.
• AI continues to boost worker productivity, likely boosting corporate margins.
• Speculators are poorly positioned for stocks to keep rallying

The stock market has room to run higher…

This past weekend, my wife, daughter and I drove to drop my son off at summer camp. He’s set to spend two weeks in a cabin with a friend he’s known since they started preschool together at the age of two.

To get there was a multi-step process. After work on Friday, I made the trip to our place at the beach. We spent the day there on Saturday before rolling out to camp on Sunday. We’ll make the same trip again next week for our daughter, who is going to try her first sleepaway camp experience.

But while we were conducting these travels, I couldn’t help but pay attention to everything going on around me. Everywhere we went was packed! The roads, the restaurants, the grocery store, and the gas stations. All of them were bustling with customers. And when we stuck our toes in the sand, it was the same story. Condo units and houses were full.

That made me think of the economy. You see, we’ve come to the same beach for over 25 years. We’ve seen what it’s like through all sorts of environments. And based on how this summer compares with past years, the consumer appears to be just fine. And when I see that, it tells me they have plenty of money to keep investing in stocks. That should underpin a steady, long-term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Personal Consumption Expenditures:

The Federal Reserve is slated to release its next monetary policy decision on Wednesday, July 30. At the meeting, Chairman Jerome Powell is expected to announce that it will once again leave interest rates unchanged, maintaining a federal funds target range of 4.25% to 4.50%. He’s likely to reiterate that it needs more time to study the effects of the White House’s tariff policies on prices.

Last week’s June consumer price index (“CPI”) data from the U.S. Bureau of Labor Statistics supported their case for a pause. The number increased to 2.7% on an annualized basis compared to the 2.4% rise in May. And it’s likely were going to see a similar move when our central bank’s preferred inflation gauge, the U.S. Bureau of Economic Analysis’ personal consumption expenditures (“PCE”) index, is released at the end of April.

The set up is similar to what we saw with CPI last week. When we look at the monthly reports over the last year, we notice that June 2024 was weak with 0.1% growth. When the new data is released, we’ll lose last year’s numbers from the annualized data. That means it will take weak data to keep the number from rising.

According to New York Fed President John Williams, PCE likely rose 2.5% in June compared to the 2.3% gain in May. That means the monthly gain is likely to be 0.3% when the data finally comes out at the end of the month. A rebound may seem threatening, it’s unlikely to sway the central bank’s outlook regarding rates. 

However, some of the forward-looking data seems a bit more promising…

Gas Prices Signal Softening:

I like to pay attention to the weekly and monthly gasoline price data from the U.S. Energy Information Administration (“EIA”). Because it’s something most of us consume in order to conduct our daily routines. That means that when prices swing one way or the other, we all feel it in our pocketbook. For that reason, it tends to be a good indicator of inflation’s direction.

The EIA tracks the average retail gas price on a weekly basis. The data covers all grades so its draws in anyone purchasing gas. I broke the data down on a monthly basis by year going back to 2010 so I can get a sense of what prices now are doing compared to typical seasonality.

In the above chart, you can see that after a slight rebound in June, prices at the pump have started to slide once more. In fact, through the first two weeks of this month, they’ve contracted 10% compared to the 8% last month and the average July gain of 4.3%.

If this trend holds up, it should help to keep a lid on inflation growth when the July numbers get reported in August. That would keep with the Cleveland Fed’s forecast for unchanged annualized growth on both a CPI and PCE basis for July.

Retail Strength Defies Rate Headwinds:

Despite all the gloom and doom headlines around tariffs, trade negotiations, and the ever-pending but yet-to-arrive economic collapse, the consumer appears to be holding up. The latest piece of information came in the form of retail sales last week from the U.S. Census Bureau.

According to the report, advance estimates of retail and food services sales for June rose 0.6% compared to May to $720.1 billion. The result was much better than Wall Street expectation for a 0.1% gain and was just below the $722.5 billion is sales in March.

I point this out as it relates to the prior comment about the Fed not lowering interest rates. Now, while I think our central bank is keeping policy too restrictive, this data suggests households are managing just fine. That means our central bank may not have to take rates back to the low levels we’ve grown accustomed to since the financial crisis.

That’s a net positive for two reasons… we want to invest in strength, not weakness… the Fed will have a better arsenal to fight the next economic crisis when it finally does happen.

I think the continued adoption of AI will play a big part in continued economic expansion…

Corporate Earnings Potential:

Last week, I discussed how the explosion of internet usage from 1990-2020 help to drive down inflation and boost economic output. As businesses got smarter and found more outlets to buy and sell goods, they saw costs drop and sales rise. I used those charts and the comparison because we’re on the front end of AI adoption. I think it will create a similar outcome in inflation, efficiency, and output.

Over the weekend, I came across this next chart. It’s from Bank of America and does a tremendous job of laying out what I was talking about. It shows how U.S. productivity per worker is starting to rise once more…

As you can see, the brokerage firm started its chart in 1986 with the mass adoption of computers and ran it through today. Along the way it shows how different advances in technology have driven efficiency gains for businesses. You’ll notice that increased usage of Big Data and AI automation are starting to drive working efficiency to new highs. That should mean that companies are seeing more dollars go to their top and bottom lines. The change should bode well for corporate America’s future earnings results.

Yet, speculators remained positioned for the stock market to drop...

Speculators Are Fighting the Tape:

This last chart comes from the CFTC’s weekly Commitment of Traders report, which details how traders are positioned. I like to watch non-commercial (speculative) positioning as a contrarian signal, since these traders are not hedging—they’re making directional bets…

The latest data shows non-commercial traders are net short 170,000 S&P 500 contracts, compared to a 10-year average of just 30,000. That’s a meaningful divergence and double where it was two weeks ago. It’s like the short is building in anticipation of disappointing corporate earnings.

However, based on recent commentary from technology companies like Oracle and Taiwan Semiconductor, demand for AI products is taking off. That should help drive higher margin and sales for the companies that make those goods as well as those using them.

If that proves to be true and stocks keep rising, those short sellers may be forced to cover, adding fuel to the current rally.

Bringing It All Together:

So, as I said at the top, I remain convicted that this market has room to run. Sure, it won’t be a smooth ride. There will be volatility, driven by policy shifts and headlines. But based on the combination of economic data, investor sentiment, and positioning, I believe we’ve got the backdrop for meaningful double-digit gains over the next year.

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