Torsten Slok on Stagflation, Tariffs, and AI Valuations

Stagflationary Pressures from Tariffs

• ⚠️ Tariffs are identified as a primary driver of a new narrative, leading to higher inflation and lower growth, a situation defined as stagflation.
• 📈 Inflation expectations have risen by approximately 1 percentage point over the next 9 months, while growth expectations have decreased by a similar margin.
• 📉 This divergence is reflected in a significant decline in the earnings revisions ratio, indicating more companies are revising earnings expectations downward.

Impact on Labor Market and Layoffs

• 💼 Companies are currently hoarding labor due to uncertainty from tariffs and general economic conditions, which explains the surprisingly low jobless claims.
• 📊 However, the consensus expects the unemployment rate to rise by half a percentage point over the next six months.
• ⚠️ Despite current labor market resilience, the underlying pressures suggest potential future layoffs.

AI Valuations and Interest Rates

• 🤖 AI valuations are considered very high, particularly in light of rising interest rates.
• ⚡ The Magnificent 7's hiring stalled as the Fed began raising interest rates, impacting companies with earnings far in the future.
• 📉 Valuations surged when interest rates were zero, and higher rates, combined with tariffs and persistent inflation, pose a significant risk, especially for business models with distant cash flows.
• 💡 The Fed's goal of slowing the economy through higher rates creates a headwind for growth stocks, which are characteristic of the tech sector.

Economic Outlook and Uncertainty

• 📊 While some data points, like Atlanta Fed's growth tracking, do not yet show stagflation, many companies report being negatively impacted by tariffs.
• ❓ The cloud of uncertainty hanging over business planning, particularly from tariffs, is a significant worry, acting as a drag on earnings expectations and GDP.
• 🎯 The consensus points to rising inflation and falling growth, which, despite differing views, is what typically drives market behavior.