- 7/1/2025
As stocks hit records, Wall Street veteran Art Hogan explains why markets still have room to run higher, and how to set up your portfolio for success.
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00:00I am joined by Art Hogan, Chief Market Strategist at B. Reilly Wealth Management.
00:05Art, great to have you joining us.
00:07Thanks so much for having me. It's great to be here.
00:09So, Art, the S&P 500 is at or near record highs.
00:14Are you a believer or skeptic of this rally?
00:18I'm certainly a believer. I think the reason we got here is pretty intuitive.
00:23We started this year in markets and were quite defensive.
00:26In general, people wanted to sort of get out of risk assets.
00:30They were selling things like technology, communication services, and consumer discretionary,
00:35and buying things that were very defensive, like utilities and health care and consumer staples.
00:40And that was all because the front end of this new administration's policy rollout
00:44was really the tough medicine, if you will.
00:47We had immigration and closed borders, and we rolled out a very chaotic trade war.
00:52And that really encompassed investors' attention all the way through to the beginning of the second quarter.
00:58Once we got past this April 2nd Liberation Day and got over the hump of some worst-case scenario predictions on tariffs,
01:06investors are starting to get a little more comfortable that some of the good policies might flow through.
01:11And what does that mean?
01:11Certainly, tariffs are not as high as we thought they would be back in April 2nd,
01:15but other things like passing a bill through Congress to continue the corporate tax rate that we have.
01:21And the other is the possibility of less regulation.
01:25And some of those things, the taxes and the less regulation,
01:29would serve as an offset to obviously higher prices because of tariffs
01:32and slower GDP growth because of less immigrations and a shrinking labor force.
01:38So to me, I think we've kind of crossed over the Rubicon on some of the worst-case scenarios.
01:42And now market participants can start looking at things and say,
01:45well, lower corporate tax is probably good.
01:47The Fed cutting rates at the end of the year, probably a good thing.
01:50And certainly, we'll start to feel the effects of less regulation.
01:53We're starting to see that in some of the big banks already.
01:57But is that all priced in with the S&P 500 at record highs?
02:00Is this as good as it gets, or can the market ultimately move higher?
02:04You know, it's interesting.
02:05Every time a market comes to an all-time high after having spent some time selling off,
02:10people get concerned that this is as good as it gets.
02:12And if we didn't have all-time highs, the S&P 500 would be back where it was when I started working at 800.
02:18So, you know, this is not as good as it gets.
02:20I think we've got some good news in front of us,
02:22not the least of which is we're likely increasing everybody's productivity because of artificial intelligence.
02:27We're likely seeing a lot of smart investment going on in data center and infrastructure build out.
02:34And that's why it would be industrials are one of the best performing sectors.
02:36I think that's very healthy.
02:38We'll likely see more publicly traded companies than we have right now.
02:41So if we went back 15 years, there was 8,000 publicly traded companies.
02:45Right now, there's only 4,400.
02:46So the fact that we're seeing IPOs come to market and having a warm reception, I think, is a positive.
02:52I think the most important positive is earnings are growing and estimates are actually going up.
02:57Last week, fact set showed that S&P 500 estimates for this quarterly earnings reporting season just went up.
03:04So beginning of the year, second quarter earnings look like they might be about 14% year over year for the second quarter.
03:09That went down as low as 7.5%.
03:10We're back up to 10% now.
03:12So that's a good sign.
03:13Earnings heading in the right direction and a lot of excitement around artificial intelligence is certainly going to continue to be a tailwind here.
03:20On that note, though, Art, the impact of tariffs has yet to really make a dent on corporate earnings or even on inflation.
03:28Do you expect that to change in the second half of the year?
03:31I do.
03:32Yeah, we're going to start to see some data reflect that.
03:35Now, data is going to be kind of messy because we had a huge pull forward by both companies and by individuals in the first quarter.
03:43You know, if you went out and bought a new refrigerator in March, you're not going to buy another one in July.
03:47So multiply that by hundreds of millions of decisions that are made by both companies and consumers, and we'll see a slowdown in purchases of goods.
03:55That's going to offset some of that initial impact of higher goods pricing.
03:59We're starting to see that in the CPIs and the PCEs.
04:02But I think when we watch through that, meaning, you know, stores run out of that pre-tariff inventory and you actually need that new refrigerator again, those purchases are going to reflect higher prices.
04:12And that's certainly going to show up.
04:14The offset to those higher goods pricing is some of the other components of the CPI basket, and energy is one of those components.
04:21So, so far, we've seen a balance here where, yes, goods pricing is starting to go up.
04:26This is the first time we've seen it go up in a couple of years post-pandemic.
04:30But you're seeing energy prices being an offset.
04:32Some of the other parts of the basket, like owner's equivalent rent or basically housing and shelter costs, have come down and likely will continue to come down.
04:39So, we're going to see inflation, but it's going to be mostly goods price, and perhaps we'll see an offset to that in things like energy and shelter.
04:48Yet we still don't actually know what those tariff rates are going to be.
04:52So, with that July 9th deadline approaching, also there's the August deadline approaching, how do you expect markets to react, especially if we don't actually get any clear answers, if we kind of kick the bucket down the road?
05:05Yeah, I get the sense that both of those self-imposed deadlines likely don't matter necessarily.
05:12So, I think the consensus view is that a lot of the rest of the world is going to look like the trade agreement that was put together with the UK.
05:20Basically, 10% reciprocal tariffs.
05:22We're going to have some carve-outs around the edges for different sectors, like they did with automobiles, slightly higher on steel and aluminum.
05:29And if that's the template that we just assume is going to happen with the rest of the world, then likely will be the case.
05:36If there's some slippage past the July 9th self-imposed deadline, I think that's probably okay.
05:41The same is likely true for this big, beautiful bill.
05:43If it doesn't get to the president's desk by July 4th, that's likely okay.
05:48They've got to the middle of August, to your point, to raise the debt ceiling so we don't have to close the government down.
05:52And you and I know we see this all the time.
05:55We tend to wait until the 11th hour and get something accomplished.
05:58But it feels as though the momentum is strong enough to get this across the goal line before we get to any important deadlines there.
06:05So, I don't know that those are necessarily going to be the bumps in the road we feel in July.
06:09I think it's going to be, to your earlier questions, about when do we start actually feeling that data show up.
06:16And I think where that shows up is in things like the labor market, which is starting to show some softening.
06:20So, in the first quarter, we averaged creating about 165,000 jobs a month.
06:26We just had the last non-farm payroll number was about 140,000, and the estimates for the next one is about 114,000.
06:33So, we're clearly creating fewer jobs.
06:35And the big question is, how many jobs does this economy need to create to keep unemployment full?
06:41Well, last year, that answer was probably somewhere between 150,000 and 200,000 jobs with the growth of our labor.
06:46But now that we have much less immigration, that number is probably somewhere between 100,000 and 150,000 jobs.
06:54So, my concern would be, when we get that jobs report, where we only create 50,000 or 75,000 jobs,
07:00do people start to get concerned that this slowing or this cooling of the labor market is going to turn into something more abrupt
07:06that could actually push us into some negative GDP growth?
07:09What is your expectation for this Thursday's jobs report?
07:15Yeah, we get a Thursday jobs report because of the holiday on Friday.
07:18So, imagine having to do all that math every month.
07:21The month of July is only going to be four days old, and you have to calculate how many people got jobs in the month of June.
07:28So, whatever happens, whatever comes out, expect the revisions to be large, right?
07:33There's 162 million people that work.
07:35We have to figure out how many of those changed on a monthly basis.
07:38I suspect we're going to be somewhere around consensus.
07:42So, that's, you know, call it 114,000.
07:44So, I think, you know, 100 to 120 is probably the acceptable range.
07:49Anything hotter than that was probably going to be good news.
07:52But we start dipping below 100,000.
07:54If we were to get a print that was like 85,000 or 90,000 jobs being created, I think that's going to turn some heads.
07:59And that's when you're going to start to hear people talking about, shouldn't the Fed be cutting rates here?
08:04Isn't one of their mandates full employment?
08:06That won't be enough evidence for the Fed, but that's what they're watching closely.
08:10They need to see that that unemployment rate is ticking up.
08:13They will defend that before they defend their inflation target because they'll believe that tariff pricing is going to be a one-time price increase and not ongoing inflation.
08:21So, yeah, that's something we're watching very closely.
08:24If we see a low number on that report on Thursday, that's going to really wake up the club.
08:30Well, the unemployment rate is expected to tick slightly higher to 4.3% from 4.2%.
08:37What would that number need to look like for a July rate cut to be in play?
08:414.4% would definitely do it, and that would be statistically outside of the norm in terms of a one-month increase.
08:52And it's not impossible.
08:53So, if you look at the weekly jobless claims, for the first quarter, they average between, call it, 205,000 and 210,000 weekly jobless claims.
09:02So, that's new people coming on and getting unemployment for the first time.
09:05That has gone up to between 235,000 and 245,000.
09:09So, that's a significant increase.
09:10At some point in time, that's going to show up in both the non-farm payroll number, that jolts report, and certainly that unemployment rate.
09:18So, if we saw it tick up to 4.4%, I think that would move the chances of the Fed cutting at the July meeting from what right now stands at about a 25% chance to north of 50% chance.
09:29We already have heard from three of the voters that they're ready to go in July.
09:34So, I think you get a sloppy report on Thursday, you likely see the Fed shifting gears a bit and making it a 50-50 proposition.
09:43Art, I'm curious how you're positioning your portfolio, knowing that the economy is slowing down, knowing that the market is at record highs, but you don't think this is as good as it gets,
09:53and knowing that there's still a lot of uncertainty out there and some headline risk that could have an impact on the overall market.
10:00Yeah, so we've got a very diversified barbell approach.
10:04And basically what that means is, on one side of that barbell, we really like the things that play into this new administration's policies as they start getting rolled out.
10:14So, one of the things that we like is industrials, and that's all about that sort of build out of telecom and AI and data center, but also repairing the energy grid.
10:25And industrials has been a cornerstone of that.
10:28We like the financials because the DREG argument really plays well into the financials.
10:33So, I think they sort of sit in the catbird seat of less regulation, being able to lend more money, buy back their shares, drive M&A activity, and certainly see increased dividends.
10:44Along with that, we like healthcare, which has been one of the beat-up sectors.
10:47On the other side, we like to stay market-weight in the AI mega-cap technology leaders because I think that while they seem expensive on a standard PE basis,
10:57there isn't one of the large-cap technology stocks that doesn't grow its earnings north of 40% and doesn't have margins that are south of 70%.
11:04So, when you think about it like that, perhaps the multiples that they have are deserved, and we're starting to see some new entrance into those mega-cap names.
11:13So, it's not just all about hardware like NVIDIA, which we've had on our focus list forever, but now software names are becoming very important in this artificial intelligence race.
11:22It's almost as though we've shifted from, okay, who's the best hardware maker, like NVIDIA, to who are some of the software companies that are going to be the first adopters to actually make money with this.
11:31So, you know, obviously companies like Microsoft and Oracle play into that, but there's a whole host of other software companies.
11:36So, that's where we kind of balance it off.
11:38We rebalance that quarterly to make sure we're not overweight on either side of that barbell, and that's going to be our approach going into the second half and into next year.
11:46The only issue, though, Art, is aside from healthcare, which has been the weak link this year along with consumer discretionary, industrials is the best-performing sector in the S&P 500.
11:57Financials is up there.
11:59Tech is up there.
11:59So, you're still comfortable putting money to work in those areas despite the fact that we've already seen this impressive run higher.
12:07Yeah, I am.
12:09I think that the reason consumer discretionary is not up there is because it's got a couple of names in the weighting that bring it down, and Tesla is one of them, right?
12:17So, Tesla is really wiping out the consumer discretionary.
12:20If you were able to buy the consumer discretionary's ex-Tesla, you'd be doing better than technology writ large.
12:27So, to us, yes, we think the tip of the iceberg for DREG and financials has just started.
12:32Industrials is a very long story.
12:33It takes multiple years to rebuild roads and bridges, to fix our electrical grid, and to just complete the data center buildouts that just started.
12:44And that doesn't even speak to how much work is being done on semiconductor fabrication and plants for more.
12:49So, I think the industrials is a very long run game.
12:52Even with the move they've had right now, the industrial PE right now as a sector is below the S&P 500 PE by 400 basis points.
12:59So, while it's outperformed this year, it's the first time people have woken up to the fact that these guys are actually doing a lot of important work that is very artificial intelligence adjacent.
13:11Art, what would you say to someone who sees the market really kind of shrugging off some of these risks out there right now,
13:18and who's wondering whether now is a safe time to invest their extra cash?
13:22Well, first and foremost, I would say this is a market that didn't shrug off a lot of things in the first quarter of this year, right?
13:29So, remember, this is a market that reacted very violently to the downside.
13:33That's important to remember.
13:35This market doesn't just ignore potential dangers.
13:38But, once there's clarity in some of those dangers, so, you know, you had an Israel and Iran conflict that lasted a good two weeks,
13:46priced into the energy market, and certainly caused concern by general investors.
13:50You had a trade war that began and looked like it was going to be a fiasco, and once we got more clarity on that, markets reacted positively.
13:58You've got markets that are reacting positively to the potential for lower taxes and for less regulation.
14:04So, this is a market that is a forward pricing mechanism, certainly pays attention to clear and present danger,
14:10but once that seems to clear up, looks ahead to the potential for better earnings and better economic growth,
14:16and I think that's what we're pricing in right now.
14:19All right, we'll leave it there.
14:21Art Hogan, always a pleasure.
14:22Thank you so much.
14:23So good to see you.
14:24Thank you very much for having me.
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