DAILY DIARY

The latest economic data indicates persistent inflation, with the PCE index showing sticky services inflation and a recent rise in goods prices, partly driven by new tariffs. While some positive indicators emerged, such as strong new home sales and an upward revision to Q2 GDP, broader metrics like declining US PMI and weakening global manufacturing suggest slowing economic growth and heightened uncertainty. Corporate reports reflect these mixed signals, highlighting the impact of tariffs on costs and consumer pressures, alongside increasing market skepticism regarding the sustainability of the AI trade's valuation.

Analysis

The economic landscape presents a conflicting picture, dominated by persistent inflation and the impact of trade policy. August's Personal Consumption Expenditures (PCE) data confirmed inflationary stickiness, with the core rate holding at 2.9% year-over-year and services inflation remaining persistent at 3.6%. Notably, goods prices have seen a lift, rising 0.9% y/y to the highest level since September 2023, a move attributed directly to tariffs. While some indicators show resilience, such as initial jobless claims falling to 218k and new home sales surging to an 800k annualized rate, other data points to a slowdown. The US PMI composite index fell to 53.6, consumer confidence dropped to its lowest since May, and commentary from the Richmond Fed CFO survey highlights tariff-related concerns weighing on capital spending. Corporate earnings reports reflect this divergence: Costco (COST) demonstrated strength with adjusted comps up 6.4%, while CarMax (KMX) sales fell 6% and the company increased its loan loss provision, citing pressure on consumers. The market is also showing increasing skepticism towards the AI sector, with commentary suggesting the massive capital expenditures required—highlighted by an $800 billion funding shortfall predicted by Bain and concerns around Oracle's (ORCL) backlog—may not generate sufficient returns, potentially marking a near-term peak for the AI trade.

Key Decisions for Investors

• Given that core PCE inflation remains lodged near 3% and the Fed is expected to maintain a 'rate tweaking cycle', investors should position portfolios for a higher-for-longer interest rate environment, which could pressure valuations on long-duration growth stocks.
• Exercise caution and high selectivity within consumer discretionary stocks, favoring value-oriented retailers like Costco that are showing resilient traffic over companies exposed to credit-sensitive, big-ticket purchases like CarMax, which are experiencing weakening demand and rising delinquencies.
• Re-evaluate exposure to sectors directly impacted by new tariffs, as seen in the pre-market divergence between Paccar (PCAR) and furniture retailers like RH (RH) and Williams-Sonoma (WSM), and monitor companies' abilities to mitigate these costs as noted by Costco.
• Critically assess high-multiple positions in the Artificial Intelligence sector, as commentary suggests the narrative is shifting from unbridled growth to concerns over capital intensity, funding gaps, and the sustainability of returns for hyperscalers like Nvidia (NVDA) and Oracle (ORCL).