Goldman Sends Inflation Warning as Tariff Impact Reaches Consumers
The big bank is anticipating a significant household change thanks to tariffs, but there is no hard evidence of that playing out.
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The major indices are trading slightly higher on Monday morning as Bitcoin IBIT challenges its all-time highs and Nvidia NVDA and AMD AMD announce they will be paying the U.S. Treasury 15% of their sales of AI chips to China.
Market participants will be watching CPI, PPI and retail sales data later this week, and there will be more news on the progress of trade and tariffs. President Trump is scheduled to meet with Vladimir Putin of Russia later this week, and there is some hope of progress on the Ukraine crisis.
Technically, the indices are in good shape but a bit extended after a week-long recovery from the downside revision of employment data. Economic concerns continue to be ignored, and AI is powering the market higher.
Earnings season is mostly over, and we are starting the weakest time of the year from a seasonal standpoint, but the market is exhibiting few signs of stress. The economists are absolutely convinced that an uptick in inflation is coming and that there are some major obstacles to growth.
Goldman Sachs issued a report this weekend stating, that so far, U.S. consumers have eaten just 22% of the cost of tariffs. They believe this will increase to 67% later this year. As a result, Goldman predicts that core PCE will rise to 3.2%. These predictions of increased inflation have been out there for a while, but so far, there is no hard evidence that this scenario will play out as anticipated.
While the bears are steadfast in the economic gloom, retail investors have remained upbeat and have been aggressive dip buyers. The Wall Street Journal noted this morning: "The resilience of individual investors may signal something more than just misplaced optimism. Their willingness to stick with stocks may be more enduring than many veterans realize. That, in turn, may help temper any eventual reversion to the mean for high-flying stocks.”
Stocks as a percentage of household financial assets are at a record high level of 36% according to Ned Davis Research. This is attributed in part to an attitude among younger investors that the stock market, bitcoin and other financial assets are now a form of entertainment. Investing has been "gamified" to some degree, which is particularly evident in the surge in option trading.
The bear’s response is that this is just typical goofy behavior by non-rigorous retail bulls and is no different than the internet bubble or other market excesses.
Maybe. It is inevitable that the market will continue to go through bear and bull cycles, but there is a shift in the attitude about trading and investing that is likely to endure. The stock market is now a part of the daily life of many younger investors, and they are likely to continue to see it as a source of opportunity even when it does undergo a bear cycle.
For now, the market is chugging along, and the bulls have the momentum. The economic arguments are not working, and technical conditions remain quite solid. The more the bears try to call a market top, the more likely they will drive the market even higher.
At the time of publication, DePorre was long IBIT and NVDA.
