LARRY KUDLOW: Trumponomics is working, as a midterm victory comes into sight

The piece argues that recent macro releases point to a strengthening U.S. economy: a three‑month annualized wage×hours proxy rose 5.6%, CPI increased 2.4% over the same period implying ~3.2% real wage growth, and unit labor costs rose only 1.1%. The author credits deregulation (citing >$1tn at EPA), 100% immediate depreciation, tariff-driven trade policy and a pickup in factory construction for boosting productivity, corporate profitability and consumer affordability, and links these developments to improved market confidence and a favorable outlook for Republicans in upcoming midterms.

Analysis

Market structure: Energy producers (XOM, CVX, COP) and fossil-fuel services (SLB, HAL) are direct beneficiaries of EPA rollbacks and tariff-driven reshoring; industrials and capital-goods names (CAT, DE, LRCX) should capture 100% expensing-driven capex demand. Losers include renewable/utility cost-basis names (NEE, DUK) and import-dependent consumer durables that face higher input tariffs. Expect margin expansion in manufacturing in the next 3–12 months as unit labor costs stay subdued (<2% rise reported) while wage-hours proxy rises ~5% annualized.

Competitive dynamics & supply/demand: Short-term energy supply expansion should put downward pressure on natural gas/oil prices (3–9 months), improving industrial margins and lowering consumer energy bills; medium-term metals and semiconductor equipment demand will rise as firms accelerate replacement and capacity (6–18 months), tightening supply and lifting prices. Cross-asset: higher growth + uncertain inflation trajectory implies upward pressure on real yields — be short-duration (<5y) into Fed reaction function; USD likely to strengthen on growth divergence, pressuring EM and commodity FX. Options market: implied vols remain compressed; selling premium in select large-cap industrials makes sense.

Risk assessment & time horizons: Tail risks include court reversals of deregulation, aggressive foreign-retaliatory tariffs, or a sudden inflation re-acceleration (>3.5% YoY CPI) forcing a hawkish Fed — each would spike yields and compress multiples within days–weeks. Hidden dependencies: capex benefits lag by 6–12 months; catalytic announcements (CPI prints, Fed minutes, high-frequency capex orders) in next 30–90 days will accelerate rotations. Monitor order books and weekly oil inventories as early signals.

Contrarian angles: Consensus extrapolates current soft CPI into permanent low inflation — miss is that wage-hours growth (5%+) plus fiscal/tax incentives can lift core services inflation in 6–12 months, pressuring multiples. The market may be underpricing duration risk; a 75–150bp move up in 10y yields would hit growth/style stocks hardest and rotate into cyclicals and commodity-linked equities. Historic parallel: 2003–2006 capex-driven commodity squeeze — act early on industrials and hedged energy exposure.

Key Decisions for Investors

• Establish a 4–6% tactical overweight to U.S. energy equities: buy XOM (2.5% NAV) and CVX (1.5% NAV) and COP (1% NAV). Time horizon 6–12 months; reduce/lock gains if Brent > $90/bbl or the EPA rollback is enjoined by court (trigger within 30–60 days).
• Initiate a 3% position in industrial/capex beneficiaries: CAT (1.5% NAV) and LRCX (1.5% NAV). Use 9–12 month horizon; complement equity with buy-write or 6–9 month call spreads (buy 5–10% OTM, sell 20% OTM) to fund positions if implied vol < historical 90-day vol by >20bps.
• Pair trade: long XOM (notional $) vs short NextEra Energy NEE (equal notional) for a 3–6 month trade to capture regulatory divergence. Close if spread narrows/widens by 10% or if EPA/legal clarity arrives within 60 days.
• Balance fixed-income: reduce portfolio duration to <5 years within 2 weeks and reallocate ~5% of portfolio into senior-secured energy high-yield bonds or floating-rate loans (target yield pickup +250–400bps vs investment grade). Exit or hedge if 10y yield falls by >50bps from current levels.
• Monitor specifics over next 30–60 days before enlarging positions: CPI prints, Fed dot revisions, weekly crude inventories, and court rulings on EPA rollback. Add to industrials if reported durable goods capex/orders grow >10% YoY or cut energy risk if tariff escalation (reciprocal tariffs announced) causes >5% downside in export-sensitive names.