LARRY KUDLOW: Trumponomics and the Fed, one of the two Kevins will do just fine

Larry Kudlow highlights a surge in business investment—non-defense capital goods shipments ex-aircraft rose at a 9.9% annualized rate over the past three months and new orders increased 8.5% (versus 5.5% over the past year)—and cites strong GDP prints (3.8% Q2, 4.4% Q3, possible ~5% Q4) and roughly 4% take-home pay growth versus core CPI 1.6% and core PCE 2.3%. He attributes the capex and productivity gains to full expensing, tax cuts and deregulation, and urges a Fed chair sympathetic to supply-side growth (naming Kevin Warsh or Kevin Hassett) to avoid policy tightening, a stance that could affect rate expectations and market positioning.

Analysis

Market structure: The narrative implies sustained, tax-driven capex (non-defense capex ex-aircraft up ~9.9% SAAR over 3 months) which directly benefits industrials, semiconductor-equipment (LRCX, AMAT), heavy machinery (CAT, DE) and select enterprise IT (MSFT, INFN). Pricing power will tilt toward producers of capital goods for the next 6–18 months as lead times and supplier constraints limit supply response; long-duration bond proxies (utilities, long-duration REITs) and low-growth consumer staples should underperform if real growth remains >3%.

Risk assessment: Tail risks include a hawkish Fed appointment or inflation prints >3% that spike 10y yields >3.75% (high-impact within days-weeks), a policy reversal ending full expensing (12–24 months), or overseas demand shocks. Immediate market sensitivity centers on Fed-chair news and monthly CPI/PCE (next 30–90 days); medium-term (3–12 months) dependency is corporate profit durability — if margins compress, capex could roll over.

Trade implications: Tactical exposure favors 6–12 month longs in industrials and semicap equipment and short duration exposure to rates. Use 3–9 month call spreads on LRCX/AMAT, buy-line exposure to CAT/DE (2–3% positions), and protect with 10y-duration puts if 10y>3.75%. Rotate out of XLU/TLT and XLP into capital goods and selected tech on confirmed order growth (>8% 3-month yoy) within 2–8 weeks.

Contrarian angles: Consensus assumes capex is permanent; it may be front-loaded to exploit tax expensing—watch for a >20% sequential slowdown in new orders as a signal. Historical parallel: 1980s supply-side booms showed late-cycle inflation spikes when capacity filled; an overlooked risk is capex-induced supply gluts lowering selling prices for commodities and some industrials, creating dispersion across names — favor stock-specific selection over index exposure.

Key Decisions for Investors

• Establish a 2–3% long position split between CAT (NYSE:CAT) and DE (NYSE:DE) within 2 weeks to capture machinery/capex tailwind; target 12–18% upside over 6–12 months, stop-loss 12% below entry.
• Buy 3–6 month call spreads on LRCX (Lam Research) and AMAT (Applied Materials) allocating 0.5–1% NAV each (buy near-term 5–10% OTM calls, sell higher OTM calls) to leverage semicap equipment pricing power; roll if 3-month new orders remain >8% yoy.
• Hedge duration: purchase 3-month TLT puts or short a 2–3% notional position in TLT if 10-year yield breaks above 3.75%; unwind if 10-year yield retests below 3.00%.
• Pair trade: overweight MSFT (1–2%) vs short XLP (1%) for 6–12 months to capture productivity-driven margin expansion; add to MSFT on any pullback >8%, cover XLP if CPI core falls below 1.8% y/y.