The yield curve has been inverted for more than a year. But there have been changes over the past few months; specifically, the inversion isn't so steep. This has implications for bond investors and the economic outlook. In April 2023, two-year Treasury note yields were about 100 basis points (bps) above 10-year yields. Now the gap is 15. There are a few reasons for this change, and they point toward an upcoming shift toward a normal upward-sloping curve in the next few quarters, in our view. First of all, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Secondly, the Fed is finally in front of inflation. The central bank is building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. This is all well and good, but if the Fed's gap is too wide for too long (we think a 170-bps gap is desirable, versus the current gap of 250-275 bps), the central bank risks tipping the economy into a recession, which is presumably what the inverted yield curve has been signaling. Fed Chairman Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they are likely to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has brought inflationary pressures to bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate cut will be next month, with a second cut in November and a third prior to year-end. Assuming lower rates keep the economy in a growth gear, longer-term rates should remain stable and the yield curve should again slope upward.

The major benchmarks were on the upside with the Nasdaq leading the way, up more than 2%, amid a surge in semiconductor stocks. Investors await the 2 pm press release from the Federal Reserve on interest rates.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Jim typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are DuPont de Nemours Inc (DD); GE Vernova Inc. (GEV); Palantir Technologies Inc (PLTR); Dicks Sporting Goods, Inc. (DKS) and the Focus List deletions are ASML Holding NV (ASML); Linde Plc. (LIN); Oshkosh Corp (OSK); TJX Companies, Inc. (TJX).

The yield curve has been inverted for more than a year. But over the past few months, the inversion isn't so steep. That has important implications for the economic outlook. Back in April 2023, yields on the 2-year Treasury note were about 100 basis points above 10-year yields. Now that gap is 33 basis points. There are a couple of reasons for this change and, in our view, point toward an upcoming shift toward a normal upward-sloping curve in the next few quarters. First of all, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are once again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Second, the Federal Reserve finally is in front of the inflation curve. The central bank is now building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide for too long, the central bank risks tipping the economy into a recession (which is presumably what the inverted yield curve is signaling). Fed Chairman Jerome Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they likely will keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has brought inflationary pressures to bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate cut will be in September, with a second cut after the U.S. presidential election and then two more cuts in 1H25. Assuming those lower rates keep the economy in a growth gear, longer-term rates should remain stable and the yield curve should again slope upward.

Has the Consumer Run Out of Steam?

In this edition, rental equipment companies haven't dug moats yet; homeowners are repairing remodel spending numbers; GE Vernova might power through the gap between position and performance; and Santos, Crown Castle, and Melrose Industries.

In this edition, Fair Isaac's upside fair; Initiating Coverage of GE Vernova; and US cable valuations have tumbled perhaps more than deserved; and Marvell Technology, Tilray Brands, and Yum China.

GE Vernova is a global leader in the electric power industry, with products and services that generate, transfer, convert, and store electricity. The company has three business segments: power, wind, and electrification. Power includes gas, nuclear, hydroelectric, and steam technologies, providing dispatchable power. The wind segment includes wind generation technologies, inclusive of onshore and offshore wind turbines and blades. Electrification includes grid solutions, power conversion, electrification software, and solar and storage solutions technologies required for the transmission, distribution, conversion, and storage of electricity from the point of generation to point of consumption.