The Daily Spark

Nominal GDP growth is currently solid at around 6%, while S&P 500 earnings growth has surged to nearly 40% YoY. A simple regression based on the historical relationship between the two suggests that the current pace of earnings growth is consistent with nominal GDP growth of 10%, see chart below.

The strong increase in corporate earnings and the resulting upside risk to GDP growth also point to upside risk to Friday’s employment report.

With strong earnings and upside risks to GDP growth and employment, the implication for investors is that interest rates will stay higher for longer, particularly when combined with the ongoing fiscal challenges.

A macroeconomic model based on the historical relationship between interest rates, GDP and inflation suggests the Fed would need to raise the Fed funds rate by about 275 basis points, from roughly 4% today to 6.75% by the end of 2027, to bring CPI back to its 2% target. Inflation would not reach target until 2Q27, even with aggressive hikes.

The bottom line is that the Fed may be further from its inflation goal than the market currently expects.

Core PCE inflation is supposed to be 2%. Unfortunately, it has been 3% for three years, and it is now moving higher, see chart below. This is the reason why the market is pricing that more Fed hikes are coming.

New data from the Fed shows that the US consumer is less K-shaped than commonly perceived.

The first chart below shows that nominal spending growth has been broadly similar across income groups since 2024, all running at roughly 4-5% YoY.

The second chart shows that household net worth has risen substantially across the income distribution since 2019, including by around 80% for the bottom 20%.

Treasury issuance in 2026 has a weighted average maturity of just 1.7 years. For US corporate bonds, it’s almost 10 years, see chart below.

One reason companies are issuing long is the scale of today’s buildout in long-duration assets like data centers, power generation, grid infrastructure and manufacturing facilities, which are financed over the long term, not quarter to quarter. For investors with obligations that stretch out for decades, like insurers and pension funds, the search for duration leads naturally to different types of credit.

The bottom line is that when the government issues short and companies issue long, the investors who need duration most will go where the duration is.

With AI disruption potentially around the corner, there is a lot of discussion about moats at the moment.

Professor Aswath Damodaran’s framework looks at the sources of competitive advantage: brand strength, switching costs, network effects, cost advantages and legal protection, see chart below.

The key distinction is not simply whether a company has a moat, but how wide and durable that moat is, and how it shows up in the numbers: pricing power, customer retention, market share and profitability.

For investors, understanding the source and sustainability of a company’s competitive advantage is critical to assessing its long-term value.

With the proliferation of AI, the moat discussion is becoming even more important. Here is a simple checklist of three questions to ask.

The AI moat checklist: Data, Workflow, Pricing

1. Data: Does the company own data its rivals can’t get?
2. Workflow: Is the company’s product part of how customers do their jobs every day?
3. Pricing power: Can the company charge more without customers walking away?

Social Security is financed mainly by a 12.4% payroll tax on wages up to an annual cap, split between workers and employers, with additional revenue from income taxes on benefits and interest on trust fund reserves.

Since costs now exceed income, the retirement trust fund is being drawn down and is projected to be depleted in late 2032, according to the 2026 Trustees Report, see chart below.

Once reserves run out, the program can pay only what it takes in, about 78% of scheduled benefits, a cut of roughly 22% unless Congress acts. Combining the retirement and disability funds, which would require legislation, would delay depletion to 2034, with about 83% of benefits payable.

Closing the gap would require raising revenue (a higher payroll tax rate or taxable wage cap), reducing benefits (a later retirement age or slower cost-of-living adjustments) or a combination of both.

The bottom line is that a possible 22% benefit cut makes it more important for households to save more and build a stream of income in retirement.

Data from the San Francisco Fed shows that core PCE inflation at 3% is split evenly between supply and demand, see chart below.

In 2022, supply was the largest driver.

The rise in the demand contribution since 2024 suggests inflation is no longer just a supply story. That matters for the Fed, because interest rates can cool demand-driven inflation but do little about supply shocks.

Every housing market has a long-term average for how much new rental housing gets built each year, measured as a percentage of its existing stock. For example, a metro might typically add about 2% to its apartment inventory annually. During the construction boom, many markets ran well above their own average, creating the “supply wave” that held down rents.

The equilibrium date is the point where a market’s new supply rate falls back to its own long-term average. Before that date, supply is above normal and can hold down rents. After it, supply is at or below normal, so that puts upward pressure on rents.

The chart below shows that only Tampa, Philadelphia and Austin are still forecasted to have above-average rental supply. With new buildings taking 12-18 months to lease up, the fading supply wave is set to put upward pressure on rents and, by extension, on shelter inflation into 2027. This complicates the Fed’s task, with inflation already running above its 2% target.

For more discussion, see our Daily Spark on the higher rates, higher rent doom loop.

Japan Weeks (Oct. 26-30), now in its fourth year, brings global investors and asset managers together to explore the opportunities in Japan’s financial and capital markets. One of the most important themes behind that opportunity is shareholder activism, which is reshaping corporate Japan. Shareholder proposals have more than tripled since 2018, reflecting a stronger focus on governance and shareholder value, see first chart below. This is starting to translate into stronger corporate profits, with profits at Japan’s medium-sized businesses (those with capital of JPY 100 million to 1 billion) reaching historically high levels, a sign that improving profitability extends well beyond the country’s largest companies, see second and third charts.