Oil prices surge to two-week winning streak as Iran supply fears grip markets
On Monday, we discussed how the Truflation inflation gauge points to a sudden price decline, which clouds the reflation outlook. Today, we share recent consumer sentiment readings that counter the disinflation story and support the reflation narrative.
On Friday, the University of Michigan reported that its consumer sentiment index improved in January to a five-month high. The index rose to 56.4, exceeding all of Wall Street’s forecasts and marking the largest increase since June.
Expectations for inflation also eased, with consumers projecting one-year price increases of 4%, the lowest reading in a year. Moreover, longer-term inflation expectations fell to 3.3%. Importantly, concerns about tariffs continue to fade, and buying conditions for durable goods improved. This all suggests that consumers remain willing to spend despite frustration over elevated prices.
While the sentiment trend is encouraging, context matters. The graph below shows the recent uptick in sentiment, but the overall level, as quantified by the University of Michigan and the Conference Board, remains very low.
While tax refunds and resilient consumption have helped sustain economic growth, the rebound in sentiment appears reflective of marginal inflation and tariff relief rather than a fundamental improvement in purchasing power.
Is It Time For The Magnificent Seven To Shine?
Over the past couple of months, the once-dominant Magnificent Seven stocks and other mega-cap stocks have stumbled relative to the small-cap, mid-cap, and value factors. Last Friday, we got our first hint that a rotation toward mega-cap stocks could be afoot. On that day, as shown in the first graphic below, large-cap growth stocks rose nearly half a percent, while small- and mid-cap growth and value fell by 1-2%.
The second graphic highlights the slight turn in their relative and absolute scores. We suspect this may continue as the performance divergence has reached short-term extremes. Moreover, with five mega-cap stocks reporting earnings this week, the odds favor upside if earnings are strong, as their prices are discounted from recent highs.
However, bear in mind that a rotation into mega-cap and large-cap growth stocks could be short-lived, and the factor performance of the last month or two could be the playbook for months to come. For now, it’s important to be patient and watch these factors, along with market sentiment, to help assess which factors will lead and lag in February and March.
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