Key Insights

The Recession Narrative is Wrong: Slowing Growth is Not a Downturn

Attribution: Sonu Varghese

Quote: "There's no sign of a recession yet. I think that's the reality and that's always good for profit growth."

While many strategists spent late 2023 and early 2024 calling for a recession, the team at Carson Group argues that the economy is experiencing a slowdown, not a collapse. Sonu Varghese points to the firm's proprietary Leading Economic Indicator (LEI), which was designed to better reflect the modern, consumption-driven US economy, unlike older, manufacturing-focused indices. This custom index, which aggregates roughly 25 indicators covering consumption, housing, and employment, is signaling that economic growth is currently below trend but nowhere near recessionary levels.

This framework allowed the team to remain overweight equities when recession fears were at their peak. Varghese notes that while aggregate income growth is slowing, the economy is still expanding at a pace of around 1.5%, which is more than sufficient to support profit growth, especially for large-cap companies. The key takeaway is that the market has correctly priced in a resilient economy, and investors who were paralyzed by recession forecasts have missed a significant recovery.

Under the Hood, This Bull Market is Firing on All Cylinders

Attribution: Ryan Dietrich

Quote: "When you see industrials, financials, communication services and tech making new weekly all time highs last week, that's the market's way of saying maybe the second half of this year is going to be okay."

Beneath the surface of the headline indices, the market is exhibiting classic signs of a healthy, broadening bull market. Ryan Dietrich emphasizes that the sectors leading the charge since the April lows are the cyclicals—areas like Industrials, Financials, Technology, and Communication Services. Conversely, the defensive sectors that typically outperform in a weak economy—Utilities, Staples, and Health Care—are lagging dramatically. This pro-cyclical leadership is a powerful vote of confidence from the market about future economic durability.

This observation is supported by powerful breadth thrust indicators. One metric highlighted shows the percentage of cyclical sub-industries with a positive one-year return cycling from below 20% to above 80%. Historically, such powerful shifts from deeply oversold to overbought conditions are the "good stuff" that marks major market bottoms, not tops. Dietrich notes that the powerful up-days in April, where over 95% of volume was to the upside, were definitive signals that the lows were in, a call that has since been validated.

The "Two-Speed" Consumer: Why Main Street Pain Doesn't Derail Wall Street Gains

Attribution: Josh Brown, Michael Batnick, Sonu Varghese

Quote: "We really have this two speed K shaped economy... you have one consumer that Effectively is driven completely by what the stock market just did in the last week. And you have another consumer that right now is showing all signs of throwing in the towel." - Josh Brown

A critical theme is the profound disconnect between the experiences of different consumer segments. The discussion highlights a "K-shaped" economy where the top-tier consumer, whose wealth is directly tied to soaring asset prices, continues to spend robustly. This group's spending on high-margin items like business-class airfare (as seen in Delta's record revenue) and their ability to borrow against portfolios fuels the earnings of S&P 500 companies.

In stark contrast, the bottom quintiles of households are struggling with persistent inflation and slowing wage growth, forcing them to pull back on discretionary spending like travel. However, as Michael Batnick points out, this lower-end cohort accounts for a negligible portion—perhaps as little as 15 basis points—of S&P 500 consumption. Therefore, while their economic pain is real and has significant social and political implications, it does not materially impact the profit streams of the market's largest companies. This explains why the market can hit all-time highs even as a large portion of the population feels left behind.

It's Not a Bubble, It's a Profit Boom: Record Earnings Justify the Rally

Attribution: Ryan Dietrich, Sonu Varghese

Quote: "Forward earnings on the S&P 500 12 months out. $281 a share, all time record... I call this the dual tailwind to a bull market. When you have these two things going up, stocks are going to follow." - Ryan Dietrich

The current rally is not built on speculative froth but on a foundation of extraordinary corporate profitability. The consensus forecast for the next 12 months of S&P 500 earnings has climbed to an all-time record of $281 per share. More importantly, corporate profit margins just hit a new cycle high of 13.7%, defying predictions from the last three years that margins had nowhere to go but down. This combination of rising earnings and expanding margins creates a powerful "dual tailwind" for stock prices.

Analyzing the market's 112% total return since the end of 2019 reveals a healthy composition. Sonu Varghese breaks it down:

• Sales Growth: ~50 percentage points
• Multiple Expansion: ~26 percentage points
• Margin Expansion: ~20 percentage points
• Dividends: ~17 percentage points

The fact that the majority of the gains have come from fundamental business growth (sales and margins) rather than just investors paying more for the same earnings (multiple expansion) provides a strong argument against claims of a valuation-driven bubble.

History as a Guide: Powerful Precedents Signal a Strong Second Half

Attribution: Ryan Dietrich

Quote: "I look at all the times you're up between 5 and 10% at the middle of the year, what happens next? And well... S&P is up 13 out of 15 times the rest of the year with above average return."

Ryan Dietrich presents compelling historical data suggesting that the market's momentum is likely to continue. He identifies two key precedents that bode well for the remainder of the year. First, when the S&P 500 is up between 5% and 10% at the halfway point of the year—as it is now—the second half has been positive 13 out of 15 previous times, with above-average returns.

Second, when the market posts gains in both May and June, which are often lackluster months, the final six months of the year have been higher 15 out of 16 times, with an average return of nearly 9%. While past performance is no guarantee, these studies underscore a powerful behavioral pattern: strength begets strength. This momentum is often fueled by performance chasing and career risk management, as professional investors who are lagging their benchmarks are forced to buy into the market, pushing prices even higher.

Insightful Quotes

Sonu Varghese: "We created something that hopefully captures the US economy... right now it's telling us the economy, economic growth is growing below trend, but not recessionary."

Ryan Dietrich: "When you have back to back super duper strong days like that, within two weeks of each other, the lows are in... Like this is it."

Josh Brown: "I really think there's a huge portion of the American public that is struggling, but none of that struggle is reflected at all in the stock market. It doesn't seem to matter to earnings, doesn't seem to matter to valuations."

Market Implications

The synthesis of these insights points toward a continued bull market, albeit one that may feel disconnected from the economic reality of many. The primary takeaway for investors is to remain overweight equities and resist the urge to fight the tape based on bearish headlines or lagging economic indicators that fail to capture the market's true drivers.

• Broaden Exposure: The broadening of market leadership into cyclicals like Industrials and Financials suggests that opportunities exist beyond the mega-cap technology names. The strength in these sectors validates the "no recession" thesis and indicates a durable economic expansion.
• Focus on the AI Capex Cycle: The AI revolution is the undisputed engine of this bull market, fueling everything from tech earnings to the industrial activity required to build data centers. Portfolios should maintain exposure to the direct and indirect beneficiaries of this multi-trillion-dollar spending wave.
• Ignore Main Street Sentiment as a Market-Timing Tool: The "K-shaped" economy means that negative consumer sentiment surveys and signs of stress in lower-income households are unlikely to derail the stock market. The wealth effect for asset owners is the dominant force, and investment decisions should be aligned with the health of corporate balance sheets and profit trends, not populist angst. The market is following the money, which remains concentrated at the top.