Don’t Push: Markets resist the narrative
July 01, 2026
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2 min
June 2026 highlights
What I Got: The growth bulls are rolling out aging demographics in their defense of the resilient consumer, arguing that the growing ranks of retirees are depressing the saving rate as they contribute less to aggregate income but continue to fuel robust spending out of retirement savings. While demographics indeed appear to be playing a role in the decline of the saving rate, the magnitude of that factor appears to be overstated. Cyclical factors are likely the greater force.
Right Back: The economic bears may be too myopically focused on the low saving rate as well. The saving rate is a residual, and tends to be heavily revised as more complete data becomes available. Importantly those revisions tend to be cyclical, biased upward in expansions and downward in slowdowns. While growth has indeed been moderating, the saving rate is likely to be revised higher as more income is “found” when more complete data rolls in.
Pawn Shop: For all the focus on the saving rate, the better tell with respect to the consumption outlook remains the continued cooling in income growth. Year-over-year nominal income growth now sits below both the fed funds rate and headline PCE inflation, suggesting consumers, particularly the lower income cohort, are facing a dual squeeze of tightening financial conditions and compressing real incomes. Upper income earners continue to support a high floor for consumption, but the dual squeeze on lower income consumers is likely to weigh on the marginal rate of growth in consumption.
Wrong Way: AI is proving to be a powerful force affecting all parts of the economy and markets. While the positive growth effects of AI on both the economy and corporate earnings have been much discussed, it is beginning to have a material effect on inflation prints as well with the infrastructure buildout pressuring the prices of computer software and accessories higher by nearly 60% annualized over the past six months. Not only is that pressuring PCE inflation higher, but it’s also becoming a material force driving a wedge between softer CPI prints and deteriorating PCE data and overstating the degree of inflation stickiness in the Fed’s preferred inflation gauge.
What Happened: We are firmly entrenched in a rotation market. The strength and scope of the AI trade is certainly part of the story behind the on-off switch beneath the market, as the AI trade sucks the oxygen out of all other sectors when it’s firing, and breathes life back into other sectors when it takes a pause. But the growing prevalence of the dispersion trade, which seeks to monetize the spread between index volatility and single name volatility, is helping to keep correlations depressed, preventing any weakness in markets from spiraling into a technically driven negative feedback loop, and keeping us firmly in a rotational market.
