Wall Street may correct soon as valuation reaches bubble zone
·
At around $217 TTM EPS and 6500 SPX-500, the TTM PE
is now ~30; Wall Street may be vying for a sharp correction and looking for an
excuse like stagflation
·
July data for US core CPI and PPI indicate that higher
Trump tariffs are beginning to show in US inflation data
·
Actual weighted average effective tariffs were ~10%
in April-July’25 against 3% during January-March 2025 and 2.5% in 2024
·
Trump tariffs from August may be ~22% on a weighted
average basis from August 2025, far higher than the Trump admin’s long-term
projections of ~10%
Since
January 2025, under Trump 2.0, the US, and also the global financial market,
have been almost fully controlled by Trump’s morning moods, Truths, random
comments and whims & fancies; not economic data and Fed comments. The
market participants remain focused on escalating trade war tensions under
President Trump and their potential impact on Wall Street and also Main Street.
But recently, Wall Street is again focusing on inflation data to understand the
effect of Trump tariffs narrative and Trump’s increasing pressure on Fed Chair
Powell to cut rates by as much as 100 bps ‘immediately’ to protect the economy
from any Trumpcession and also to lower borrowing costs of the Government as
the US is set to roll over ~$9T of public debt (TSY) in Q3CDY25 and for that,
Trump is desperately seeking lower borrowing costs (bond yields/ coupon rate).
On August 12, 2025, apart from the ongoing Trump
tariff & Fed tantrum, some focus of the market was also on U.S. inflation
data for June. The US CPI measures the average change over time in the prices
paid by urban consumers for a market basket of consumer goods and services,
such as food, transportation, and shelter. Core CPI excludes the volatile food
and energy categories to provide a clearer view of underlying inflation trends.
On August
12, the BLS data (NSA) shows the annual (y/y) US core CPI inflation rose at 3.1%
in July against 2.9% sequentially and
above the median market expectations of 3.0% and also pre-COVID December’2019
of 2.3%, the real Fed target for core CPI inflation. Overall, the latest trend
of US core CPI and PPI indicates a visible impact of higher effective tariffs of
~10.5% vs earlier 3.5% on US goods. The US core PPI jumped 3.7% in July, more
than core CPI in the last few months, pushing producers' margins down and also boosting
consumer prices.
The 3MRA
(three-month rolling average) of US core CPI was 2.9% in August’25, against 3.3% yearly (y/y) and still above
December’19 pre-COVID 3MRA of 2.3% and the Fed’s price stability targets for
core CPI levels of 2.3%; i.e. Fed needs to bring down core CPI inflation to the
least 2.3% on a sustainable basis from present average of 3.0% to achieve its price
stability targets. The 2025 YTM average of US core CPI inflation was around
3.0% in July’25 against 3.4% in 2024 and 3.9% in 2023.
Overall, the average US core CPI was at 3.0% in
2025 (YTM), against 2.0% in 2019. The US core CPI has increased 26.5% cumulatively
from January’19 to July’25 at an average run rate of 4.0%, almost double the
normal 2.0%.
On August
12, the BLS data (SA) also shows the sequential (m/m) US core CPI rose 0.3% in July’25 from 0.2% in the
preceding month and line with the market expectations of 0.3%. Overall, the
2025 average (YTM) 2024 average was 0.2% against the 0.3% in 2023, 0.5% in
2022, and 0.1% in 2019 (pre-COVID). The US core PPI jumped 0.9% in Jul’25, the
highest since March’22 post-COVID time.
Overall,
the 2025 average (YTM) was 0.2% against 0.3% in 2024 and 0.1% in 2019
(pre-COVID).
In July’25,
the BLS data shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars
& trucks) rose at 2.4% from 2.2% in the month compared to 1.7% in pre-COVID
(Dec’19) times. The US Trimmed Mean CPI (Cleveland Fed) was unchanged at 3.2%
in July’25 against pre-COVID levels of 2.3%.
On August
12, the BLS data (NSA) also shows the annual (y/y) US total CPI inflation
increased at 2.7% in July’25
from 2.7% sequentially, below the median
forecasts of 2.8% and the highest since Feb’25.
In July’25,
the US PPI jumped by 3.3% against 2.4% in June and 1.4% in December’19
pre-COVID times. The US food
inflation eased to 2.9% from 3.0% sequentially, while energy inflation fell by
-1.6% in July against -0.8% sequentially. The US food inflation was around
+1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%,
and total CPI (headline inflation) was +2.3%, at the Fed’s target and
equivalent to total PCE inflation +1.5%.
Overall,
the 3MRA of US CPI inflation
was 2.6% in July’25 vs 3.2% yearly. The 2025-average US CPI was 2.6% in June
(YTM) vs 3.0% in 2024 and 2.3% in 2019 (pre-COVID); officially, the US Congress has given the Fed a price stability
mandate of 2.0% CPI inflation on a sustainable basis, not core CPI or core PCE,
and even total PCE inflation.
On June
15, the BLS data (SA) shows the sequential (m/m) US CPI surged to 0.2% in June’25 from 0.3% in the
prior month, below the median market expectations of +0.3% In July’25, the
index for shelter rose 0.2% and was the primary driver. Other increases were
also seen for medical care (0.7%), airline fares (4%), recreation (0.4%),
household furnishings and operations (0.4%), and used cars and trucks (0.5%). In
July’25, the US PPI surged +0.9%, the highest since March’22, and much higher
than expectations of 0.2%.
On the
other hand, overall food inflation is now stable, but considerable energy
disinflation is dragging both headline CPI and US import inflation.
The US PPI
is in sync with the US import inflation.
The 3MRA
of sequential CPI was 0.2% in July’25.
The US
service and rent/housing inflation is again increasing, along with goods
inflation.
Overall,
even if we assume a 0.2/0.3% sequential core CPI rate for the next few months
on average, the 12-month (y/y) core CPI rate would be around 3.0% on average. The sequential core CPI rate may be around
0.2-0.3% in H2CY25 as the US core inflation may have bottomed out in H1CY26,
and the effect of Trump tariffs would be visible in the coming months.
Frontloaded US imported goods may have been replenished by June 25. The US core
CPI inflation may scale around 3.5% by December’25.
The US
collected ~$75B of tariffs in 2024 on $3360B goods imports, translating to an
effective weighted average tariff rate of ~2.2%. Against this, the US collected ~$102.38 tariffs in
2025 (till July) on $1881.60 worth of goods imports, translating to an
effective weighted average tariff rate of ~5.4%; i.e., only an additional
effect of 2.4% with an equal distribution among US importers, global exporters
and also US consumers. The muted effect of higher import duties on inflation
through H1CY25 stems from time lags in price transmission, tariff exemptions,
and rollbacks, declining import volumes, cost absorption by businesses,
consumer substitution, and the structure of inflation metrics.
Theoretically, the weighted average Trump tariff
rate should be ~12% during Apri-July’25, but in reality, it was ~10% on average
against 3% during January-March’25. Thus the higher effects of Trump tariffs are
now beginning to show in US consumer prices to some extent even after
supposedly equal distribution of additional tariffs among US importers,
consumers and global exporters.
While tariffs raised costs for specific goods
(e.g., clothing, autos), these effects were diluted in broader CPI data and
likely emerged more prominently after May 2025 as pass-through increased and
exemptions expired. Also, import data is showing front-loading from November’24
to March’25 to beat Trump tariffs ahead of Trump’s April 2 Liberation Day
reciprocal tariffs announcement. Now, both Wall Street and Main Street and
Global Street are bound to be affected to some extent, as all these
stakeholders may have to bear some portion of additional Trump tariffs.
Overall, the
effect of Trump tariffs on the US inflation data is muted so far:
·
Front-loading of
imports in Q4CY24 and Q1CY25 in
anticipation of higher Trump tariffs
·
Lack of adequate
pricing power by US importers/producers
·
Likely discount
by exporters to some extent to retain market share
·
Fed is assuming
15.5% weighted average Trump tariffs as a base case for the longer run, which
may be equally borne by US importers, consumers, and also exporters at around
1/3rd each.
·
There would also
be factors of cross-currency devaluation like lower CNY against USD to some extent,
adjusting higher import and lower export prices on both sides.
·
Under this base
case, Trump’s tariff may boost headline CPI inflation to around 3.5-4.0% as a
one-time effect (transitory)
·
US import
inflation was lower in the last year; the US import price index was 141.5 in
May’24 against 141.30 in June’25; i.e. 0.14% decrease in 13 months, and almost
zero imported inflation and resulted into similar inflation for US goods; US
imports almost 50% of its merchandise goods requirement and out of that 15%
imported from China directly and another 35-50% indirectly through so-called
Chinese proxies (transshipments) through Mexico, Canada, EU and Vietnam mainly,
resulting in cheaper US imported goods and goldilocks nature of the US economy.
Also, imported energy disinflation is helping headline US import inflation in a
muted shape.
Conclusions
Overall deflationary trend in imported goods
inflation and stable employment are providing the Federal Reserve (Fed) with
room to maintain current interest rates as it assesses the economic impact of
Trump’s uncertain policies on trade, tariffs, techs, immigration, deportations,
deregulation, tax cuts and other potential fiscal issues including the planned
hand out of $1000 each to a new baby. However, the narratives of higher tariffs
by the Trump administration have raised concerns about potential future inflationary
pressures in the H2CY25 data.
Trump is set to impose ~20% weighted average
tariffs from August 2025 vs ~10% actual tariffs in H1CY25. The additional
impact may be bound to be visible in the corporate report card
(absorption/eating of tariffs) not only in the US, but also globally, and the labor
market (employment) is bound to be affected along with headline and core
inflation; i.e. Trump tariff tantrum may cause a synchronized global
stagflation in the coming months.
Despite various narratives, the Trump administration
projected a 10% weighted average effective US tariffs in the longer run.
Looking ahead, Trump may withdraw 20% additional Fentanyl tariffs on China and
25% on Canada and Mexico from October 2025 or January 2026 for ‘satisfactory
compliance’ in preventing the smuggling of the synthetic opioid into the US.
This will help the overall weighted average effective US tariffs rate closer to
~15% and the net effect after adjusting previous tariffs, exporters’ profit,
and FX factors closer to ~10%.
Trump
has also extended his reciprocal tariffs pause on Chinese goods from August to
Novbember-December’25 to ensure no supply shock for the US economy. Trump may
continue his chaotic tariff policy to get a fair trade deal for the US. If Trump goes on with his higher reciprocal
tariffs @20%, it would cause a supply shock and a higher cost of living for
ordinary Americans, most of whom live on a pay check to paycheck-to-paycheck
basis. Further, such tariffs would cause a demand shock in the future and an
all-out recession. This will also cause a loss of Vote Bank (ordinary
Americans) and Note Bank (political funding by corporate America) for Trump and
Republicans. Thus, Trump is bound to blink and may take a less hawkish tariff
position in the coming days, especially on China, Canada, Mexico, Japan and the
EU, the top five US exporters. The Trump admin may finalize tariffs by October
2025.
Fed may cut
in September and December 2025 even after considering higher Trump tariffs as
transitory. Although the Fed generally talks about 2.0%
PCE inflation as a price stability target, in reality, it maintains 1.5%
core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9%
average inflation (PCE+CPI) targets, US Congress has entrusted along with
maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline
unemployment rate.
Fed may exit QT for $5T UST; MBS QT will continue;
Fed may replace MBS depletion with UST in the future in a systematic way; this
may help bond prices to go higher and yields lower to pacify Trump & Co.
Fed may also going for rate cuts from September 2025 citing higher
tariff-related inflation in future as transient. Lower inflation is currently a
function of the favorable base effect (higher base) and front-loading of
imported goods to avoid higher Trump tariffs. But 15-20% weighted average Trump
tariffs effective from August 2025 may boost US inflation in H2CY25.
The Trump admin also knows this fact and thus is now
pressuring the Fed to go for a crisis-era rate cut of 100-200 bps at a time or
within a short span. By pressuring the Fed, US President Trump is complicating
the Fed’s job more and also hurting the future credibility of the Fed as an
independent institution. This may hurt the USD's credibility as a global
reserve currency in the future and the US may be losing the advantage of its
greatest weapon, the USD hegemony, which it uses for geopolitical influence and
becoming the number one superpower in the world.
At around
217 TTM EPS and 6500, the TTM PE of SPX-500 is now ~30, at the bubble zone.
But
at around 217 TTM EPS, and 6500 SPX-500, the TTM PE is now around 30, at a historical
bubble zone. The actual SPX-500 EPS was ~210 in CY24 vs 192 in CY23; at around
11.5% projected growth (R/R 10.6%), the CY25 SPX-500 EPS may be around 234 and
at 20 fair/base case PE, the fair value of SPX-500 may be around 4680, while at
25-30, the best and bubble case valuation may be around 5850-7020 for CY25.
The
SPX-500 and also Wall Street are currently trading around a historically bubble
zone and bound to correct sharply for any adverse news flow like in the Ukraine
war, Trump tariffs and Fed rate cut trajectories. In the longer run
Trumpflation/stagflation and growing bubble over AI & Crypto may cause a 1990s
type dotcom bubble crash of the market.
Market Wrap
Wall
Street surged for the week ended August 15 on hopes of an imminent ceasefirefor the Ukraine war ahead of the Trump-Putin summit in Alaska late Friday. Also
upbeat US retail sales, hotter US core CPI and PPI data undercut risk trade
sentiment as Fed may not cut more than 25 bps in H2CY25 against market
expectations of 50 bps. On Friday, August 15, Wall Street closed mixed. The
S&P 500 slipped 0.3% after briefly hitting a record high, while the Nasdaq
fell 0.4% amid weakness in chipmakers, with Applied Materials tumbling 14% on a
subdued guidance and Nvidia lost 0.9% after paying 15% of its Chinese revenue
as export tax to the US. The Dow (DJ-30) finished 35 points higher after
touching records higher earlier in the session, lifted by a 12% surge in
UnitedHealth after Berkshire Hathaway disclosed a major stake The S&P 500
and Nasdaq gained 0.9% and 0.8% on the week, while the Dow outperformed, rising
1.7% amid reduced Trump tariff, Fed rate cuts and Ukraine war uncertainty.
Weekly
Technical outlook: DJ-30, NQ-100, SPX-500 and Gold
Looking
ahead, whatever may be the narrative, technically Dow Future (CMP: 45000) now has to sustain over 45600 for a
further rally to 45800 and only sustaining above 45800, may further rally to
46100/46500-47100/47200 in the coming days; otherwise sustaining below
45300-44900, DJ-30 may again fall to 44200/43900-43400/42400 and
41700/41200-40700/39900 in the coming days.
Similarly,
NQ-100 Future (23800) now has
to sustain over 24250 for a further rally to 24300/24450-24700/25000 in the
coming days; otherwise, sustaining below 24250/24000-23750/22900, NQ-100 may
again fall to 22400/22200-21900/20900-20700/20200 and 19890/18300-17400/16400in
the coming days.
Looking
ahead, whatever may be the fundamental narrative, technically SPX-500 (CMP: 6475) now has to sustain over 6600 for a
further rally to 6800/7000-7500/8300 in the coming days; otherwise, sustaining
below 6550/6500-6450-6375/6300-6250/6200, SPX-500may again fall to
6000/5800-5600/5300 in the coming days.
Technically
Gold (CMP: 3325) has to sustain over
3360/3375-3405/3425 for a further rally to 3450/3475-3495/3505*, and even
3525/3555 in the coming days; otherwise sustaining below 3355, Gold may again
fall to 3330/3320-3300/3280* and 3255*/3225*-3200/3165* and further to
3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.
Disclaimer: I
am an NSE-certified Level-2 market professional (Financial Analyst- Fundamental
+ Technical) and not a SEBI/SEC-registered investment advisor. The article is
purely educational and not a proxy for any trading/investment signal/advice. I am a professional analyst, signal provider,
and content writer with over ten years of experience. All views expressed in
the blog are strictly personal and may not align with any organization with, I
may be associated.
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professional market analytics, you may contribute to my PayPal A/C: asisjpg@gmail.com
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