LARRY KUDLOW: Forget the lefty rabble babble, the Trumpian economy is booming

The article argues the economy remains strong, citing Atlanta Fed GDPNow growth of 3.7% for Q2, private payrolls up 123,000, unemployment at 4.3%, and unit labor costs rising only 1.2%. It also highlights stronger business conditions, with nonfarm productivity up 2.9% and profits described as the best in at least 20 years, alongside record stock markets. Main headwind mentioned is the war-driven energy shock, but the piece frames it as temporary and outweighed by broader economic resilience.

Analysis

The key market implication is not simply “growth is strong,” but that the composition of growth is becoming more inflation-efficient. If labor gains are being driven by productivity and hours rather than headcount, margins can stay resilient even with sticky wages, which supports large-cap cyclicals, industrials, and the highest-quality domestic compounders. The more important second-order effect is that this mix reduces the odds of a classic late-cycle earnings recession, so breadth should improve beyond the mega-cap winners if the data persists for another 1-2 quarters.

Energy remains the main swing factor, but the market may be underestimating the asymmetric hit to second-order consumers versus the direct benefit to producers. Higher fuel acts like a tax on discretionary demand and transport-intensive sectors, yet the pass-through usually arrives with a lag, meaning the near-term winners are still refiners, upstream energy, rail/air exposure hedges, and firms with pricing power. The risk is that if energy stabilizes at an elevated level rather than spiking further, the inflation impulse can linger long enough to keep rates sticky without triggering the full demand destruction that would help rate-sensitive sectors.

The bigger contrarian point is that a stronger labor market in this regime can actually be bearish for some parts of equities if it delays easing and keeps real rates restrictive. Markets may be too focused on “no recession” and not enough on the possibility of a prolonged plateau: solid nominal growth, but insufficient slack for the Fed to pivot quickly. That favors quality balance sheets and cash-generative businesses, while leaving long-duration, unprofitable growth and highly levered consumer discretionary names vulnerable if real yields remain elevated into the next payroll and inflation prints.

Key Decisions for Investors

• Add to XLE / OIH on any pullback over the next 1-3 weeks; thesis is that elevated energy prices and resilient nominal activity extend cash-flow upgrades. Risk/reward improves if crude stays firm but the broader market keeps bidding cyclicals.
• Initiate a pair trade: long XLI or KRE vs short IWM for the next 1-2 months. If growth stays stable and rates stay restrictive, domestically oriented small caps should lag while quality industrials and banks benefit from stronger nominal activity.
• Buy put spreads on ARKK or IWM expiring 2-3 months out. The setup is a slow-burn headwind from sticky rates and energy, with better payoff if the market starts pricing “higher for longer” instead of recession.
• Consider long retail energy-beta hedges only where pricing power is weak: short consumer discretionary baskets versus long staples/defensive transport over the next quarter. The lagged squeeze from fuel costs should show up first in lower-margin names.
• If looking for upside convexity, buy calls on KRE or a regional bank basket into the next 4-8 weeks only if credit data remains clean; the bull case is that a strong labor backdrop supports credit quality and deposit stabilization without forcing aggressive rate cuts.