Get Used to a Higher Degree of Volatility, Says BofA’s DeMare

Recent financial news presents a mixed economic picture, with strong US retail sales and declining jobless claims signaling robust consumer health, while United Airlines' CEO projects an upside to earnings targets. However, significant macroeconomic risks persist, as Morgan Stanley's Mike Wilson identifies tariffs as a major third-quarter concern, and Goldman Sachs highlights oil inventory builds as the biggest question for commodity prices.

Analysis

Recent data presents a bifurcated economic landscape, creating a complex environment for asset allocation. On the positive side, the US consumer exhibits significant strength, evidenced by a surge in June retail sales and a decline in jobless claims, suggesting a robust foundation for domestic-facing industries. However, this is counterbalanced by material macroeconomic headwinds. Morgan Stanley's analysis flags tariffs as the primary source of risk for the third quarter, creating a significant overhang on market sentiment and corporate planning. Concurrently, Goldman Sachs highlights that oil inventory builds are the most critical variable for energy prices, introducing uncertainty into a key economic input that affects inflation and corporate margins. Amid these cross-currents, specific corporate outlooks remain optimistic, such as United Airlines' CEO projecting an 'upside' to earnings targets, indicating that strong consumer demand may be insulating certain sectors like travel, at least for now.

Key Decisions for Investors

• Given the strong consumer data but significant tariff risk cited by Morgan Stanley, investors should closely monitor trade policy developments as the key potential catalyst for market volatility in the third quarter.
• Consider maintaining exposure to consumer-driven sectors like travel and leisure, where companies like United Airlines are demonstrating confidence in their earnings outlook, potentially capitalizing on robust household spending.
• It may be prudent to assess and potentially hedge against energy price volatility, as Goldman Sachs identifies oil inventory data as the primary source of uncertainty for commodity prices, which could impact broader inflation and corporate costs.