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A post-pandemic 'new normal' matters more to investors than AI: Morning Brief

This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:

  • The chart of the day

  • What we're watching

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  • Economic data releases and earnings

The first half of 2024 left little doubt for investors — this is an AI-fueled market.

With Big Tech companies accounting for the majority of both stock market gains and earnings growth in the S&P 500 this year, investors are rightly focused on what's next for the AI trade.

Looking past this year, however, investors are still mulling one of the most important and unsettled questions to emerge from the pandemic: What's normal now, anyway?

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Writing in a note to clients on Tuesday, Lori Calvasina, head of global equity strategy research at RBC Capital Markets, wrote that not only are investors still figuring out what these post-COVID new normals for the economy and stock market are, but that "it's keeping many of them calm."

Calvasina added that as she and her team meet with clients, "What’s been most interesting to us recently, particularly as the path of the monetary policy has been debated, is how the basic idea that the post-COVID era will look very different from the post-GFC era and even the post-Tech bubble era, continues to resonate with many investors in the long-only community."

The day-to-day discussion in markets, as Calvasina noted, is basically a running dialogue about what the Fed should, will, needs to, or can't do next. Hold rates? Cut rates? When? And so forth.

Much like sports debates about which team should've won last night's game and how a certain team can win tomorrow's contest, daily and weekly market discussions look at what Jay Powell & Co. did in June, what they might do this month, and what they ought to do in September.

FILE - Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, June 12, 2024. Powell will be in Portugal on Tuesday, July 2, 2024, to take part in a panel discussion on central banking policy with members of the European Central Bank. (AP Photo/Susan Walsh, File)
Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, June 12, 2024. (AP Photo/Susan Walsh, File) (ASSOCIATED PRESS)

It's all great fodder for the financial media and the grist for daily market moves. And pinpointing the right-here-right-now trade has plenty of value for a certain kind of market participant and a certain slice of some portfolios.

But past the play-by-play, the bigger picture that Calvasina's team hears clients weighing is more in line with what central bankers think the long-run neutral rate will be rather than what rates will be in a few months. The destination, rather than the path, matters more.

For investors, a world with higher inflation but higher interest rates "[was] seen as the trade-[off] for a healthier underlying economy than what had been experienced post-GFC," Calvasina's team noted.

For consumers, making peace with this new normal may have less appeal.

But we think the idea advanced in Calvasina's conversations is worth reiterating to investors during a year in which markets have been dominated so far by AI and are set to be dominated in the coming months by politics.

The next wave of technological innovation and leadership atop the world's biggest economy matters for investors. Yet, in some ways, these changes are never settled. Technology has been redefining the corporation and its profitability for decades. Politics has been a risk for investors forever. And the scale of these questions almost diminishes the need to offer an answer.

Finding a post-pandemic new normal for markets, however, is really about seeking an answer to the most fundamental question investors can have — how much does it cost to borrow money, and what do I need to make to justify more?

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