The Dividend Cafe - Tuesday - August 5, 2025

Episode Date: August 5, 2025

Economic and Market Analysis - August 5th In this episode of Dividend Cafe, Brian Szytel provides a comprehensive analysis of the market and economic conditions as of August 5th. He discusses the marginal declines in the Dow, S&P, and Nasdaq, and a noteworthy shift from growth to value stocks. Sitel delves into the ISM Services index slightly missing expectations for July and touches upon PMI numbers. He explains the correlation between current Fed policies, interest rates, and foreign investment. The episode also highlights earnings season progress, with revenue and earnings growth showing positive year-over-year trends. A significant focus is placed on market valuations, the role of artificial intelligence investments, and the overall economic outlook. Finally, Brian answers a viewer question regarding interest rates and Fed policy. 00:00 Introduction and Market Overview 00:28 Economic News and Indicators 02:22 Interest Rates and Fed Policy 04:29 Earnings Season Insights 05:33 Market Valuations and Future Outlook 06:49 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividing Cafe weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Good evening and welcome to Dividend Cafe. This is Tuesday, August 5th, Brian Saitel with you on a benign lower trading day today. The Dow was down 61 points on the day. S&P was off about a half of a percent, NASDAQ was down about two-thirds of a percent. So you had a rotation from growth to value with some of those staples and value-oriented parts of the market outperforming. And there's a reason for that. We got some economic news today. Nothing earth-shattering, but there was a read on ISM Services Index, which missed for the month of July, just slightly. We read a 50.1, and what was expected was 51.1. I know those numbers seem arbitrary for many of you, but just understand it's a slight miss

on services, and inside of that number, there were weaker new orders and employment inside of it with prices that were paid a little bit higher. So it's the worst of all worlds where you got a little bit sluggish numbers with a little bit higher prices. It's not really what we want to see out of services. That said, it's still an expansion of territory, but just barely. Anything over 50 on the ISM numbers is considered expansionary. So we've got a 50.1, so we'll chalk it up to a slightly expanding services number.

We also had a PMI number, which is manufacturing and services. This was just a revision, so a final read from the S&P, which was very strong. We actually saw 55.7, which was up to 52.09 the month before. So a little bit of a mixed bag there on ISM and then PMI numbers, different periods of time. But you had interest rates that were totally flat, so 10-year didn't budge at all. Where we are in the yield curve, you've got the 210 now at about 48 basis points. So you've got a steepened yield curve because short-term rates have now come down, particularly since the jobs number that we got last week,

with the odds of a Fed rate cut now moving significantly higher, almost double for a September rate cut now, which is in the 80s, 80% range. You had two-year yield start the year at 4.30 and we're at 3.7%. 70 now. So that's a 60 basis point difference just in the course of the start of the year here on the two year number that gives you an idea of where Fed expectations are. And that's my segue into the comment into the Ask TBG question in there today, which was based around interest rates and really on Fed policy. There was a comment that David had about lower interest rates and foreign investment. This particular question was asking for more clarity around that. So there's

two things. One, monetary policy is set either in restrictive stance, neutral stance, or an easing stance, that neutral is always an arbitrary number because we don't exactly know what that means. But assuming that something slightly over inflation, in today's terms, would put it perhaps somewhere in the three and a half percent range, if you thought inflation was going to be somewhere in the two and a half percent range, a 1 percent real rate, would put a neutral Fed Fund policy at around three and a half. We're at four and a quarter to four and a half. So the comment was more about that being more restrictive and trying to get to a neutral stance, I think would be more appropriate based on what we're seeing with employment, based on the need to no longer necessarily stimulate the economy, but also not to hold it back either, to just be neutral. So there's that comment.

But on foreign investment, when you have more neutral rate versus a more restrictive rate that provides more liquidity, so that means that there's more lending going around in the economy. from a foreign investment standpoint, that can be a benefit for investment. And so you've got capital flows, capital investment, and just productive activity, basically, as being helped with that particular stance. And that was the comment. If you're looking at capital flows from a currency standpoint, of course, lower interest rates means typically a little weaker currency versus the opposite. But then all of this stuff has to be tethered to a relative basket of what everything else is going on. you have to look at other currencies and what other central banks are doing around the world,

particularly China, Europe, and Japan, which are the three largest central banks in the world. But there you have it on the AskTBG side. I thought it was a good question and a good answer. As far as some of the other comments that we had in there today, we were talking about earnings and just where we are, believe it or not, we're already two-thirds way through the earnings season. So it's come and gone here pretty fast. So far, you've got revenue growth that's up 5.6. which is good year over year, and you've got earnings growth that is double digits again,

which is 11.2% year over year. So both of those things have been better than expected. I wrote about that a lot originally, and that's what we're seeing now play out. That said, when you started the year, call it 5882 on the S&P, and you had a full year earnings number that was estimated at 279, even though we've gotten growth year over year here, about halfway through the year, a little more than halfway through the year. The number for full year on the EPS is still lower. It's 267. Not to bore everyone, but if you took a division and just multiplied where multiples are, we started the year around 21 times and we're at about 23.7 now after a good earning season. So we need the rest of the year to exceed expectations to price in what is already expected in markets. We talk about

it a lot. They're just expensive. But that doesn't mean that they're going to go down. In fact, looking at where valuations are is really a horrible predictor on price movement in the short term. Of course, over the long term, it can be very helpful. Just because we're trading it 23 times doesn't mean we're doomed to go lower in the short term. What the market's doing is pricing in the future, of course, and what it's pricing in is so far, porridge is just right on the economy. It's hanging in there just fine. Earnings are coming out fine.

Labor has weakened a little bit, and inflation has come down here, and that's giving the Fed a little bit more room to go ahead and cut interest rates. And so that's looked at being additive to the economy. Then we'll have eventually Q3 earnings through the latter part of the year. There's also a huge amount of capital expenditure in the artificial intelligence base that's in the market. Just the MAG7 has over $400 billion of spending. That's more than the EU spends on defense, if you want to put it in perspective.

So these are big things and big market movers going on in the economy. and a lot of that's getting priced in here. So as we've spoken about many times, as we like to play this, it's definitely more selectivity, it's definitely more value-oriented, and keeping valuations at the forefront. But that's what I have for you today. I will let you go for this evening. I'll be back with you tomorrow, which will be Wednesday.

I wish you well. Reach out with your questions. Thank you very much. The Bonson Group is a group of investment professionals registered with High Tower Securities LLC, member FINRA and SIPC, with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors, LLC.

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