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

The article argues the U.S. economy remains strong, citing Atlanta Fed GDPNow at 3.7% Q2 growth, private payroll gains of 123,000, unemployment at 4.3%, and nonfarm productivity up 2.9% with unit labor costs rising just 1.2%. It also points to a 4.7% wage-income proxy increase, implying real income growth above the roughly 3% inflation rate. The piece frames rising energy prices as a temporary war shock and links the backdrop to record stock markets and strong corporate profits.

Analysis

The market takeaway is not simply that growth is firm; it is that the composition of growth is shifting in a way that protects margins. Higher blue-collar income paired with still-subdued unit labor cost growth is a near-term sweet spot for cyclicals with pricing power: firms can see volume resilience without the classic late-cycle wage squeeze. That combination argues for continued upside in domestically exposed industrials, business services, and select consumer discretionary names that benefit from a healthier lower- and middle-income consumer.

The bigger second-order effect is that energy shock inflation may prove less toxic to equities than the consensus expects if it is perceived as transitory and offset by stronger nominal growth. In that regime, rate sensitivity matters more than headline inflation: if bond yields stay anchored while nominal GDP stays hot, equity leadership should broaden beyond mega-cap growth into financials and cyclicals. The risk is that the market misprices the persistence of the energy shock and the Fed re-accelerates hawkish messaging, which would hit long-duration assets first and only later bleed into cyclicals.

This setup also increases the probability of a near-term earnings beat cycle: operating leverage improves when labor costs rise slower than revenues and demand does not crack. The contrarian view is that consensus may be underestimating how much of the strength is being front-loaded by policy and sentiment, making the next 1-2 months look better than the next 2-3 quarters. If energy prices remain elevated or policymakers tighten into the strength, the earnings narrative can flip quickly from ‘margins expanding’ to ‘demand destruction,’ especially in transport, airlines, and lower-end retail.

Key Decisions for Investors

• Add to XLI on dips over the next 1-2 weeks; the setup favors industrials with domestic pricing power and operating leverage. Risk/reward is attractive for a 1-2 month hold if growth remains above trend and yields stay range-bound.
• Initiate a long XLF / short IWM pair trade for the next 4-8 weeks; stronger nominal growth and stable labor trends should support large financials more than small caps, which are more exposed to funding costs and margin pressure.
• Buy call spreads in XLY for 2-3 months, focusing on sub-segments tied to lower-income spending resilience. This is a tactical trade on volume strength rather than multiple expansion; take profits if energy-driven inflation broadens into discretionary weakness.
• Short JETS or avoid airlines for the next 1-2 months; if energy prices stay elevated, fuel sensitivity and weaker fare elasticity can quickly compress margins. Use a tight stop if crude retraces materially or demand data softens less than expected.
• Use SPY put spreads as a hedge against a hawkish policy repricing over the next 30-60 days; the market is likely underpricing the chance that strong growth plus sticky energy forces higher real-rate expectations.