$60 Crude Projected

We are projecting that crude trades below $60 per barrel over the next month as excess storage built up in the Persian Gulf during the war hits the market and OPEC, including Iran, ramps up production to its maximum capacity of 32 million barrels per day. This decline will occur despite the Strait only currently operating at approximately 50% capacity since the Saudis continue to move 7MM barrels per day on the Yanbu pipeline, and the UAE utilizes the ADCOP pipeline to export 2MM barrels per day. In addition, the Chinese continue to restrict imports by up to 5MM barrels per day. With 4-6MM of excess production on the market we expect OECD inventories to rapidly rebuild to normal levels over the next month. 

The 30% decline in oil prices over the last month has caused gasoline prices to decline by almost 20%. We project that this will cause headline inflation to be negative .2% for June (consensus -.1%) and expect core CPI to be only .25%. We also expect July CPI to be negative due to continued declines in crude and the averaging effect is fully reflected in July. After these prints we expect the increases implicit in Fed Fund futures to be removed.

In addition, we expect core CPI and PCE to decline gradually over the next year as the deeply flawed shelter component gradually reflects declining market rents. Also, airline fares, which are included in core, are likely to decline. We are also optimistic that the Fed task force will reform the indices to reflect real time market prices, which will correct both the shelter estimate and the misleading imputed financial services component. We expect these factors to lead to the market pricing in 3 cuts over the next year which will drive the 10-Year below 4% as the 10-year normally trades at 100 over the terminal Fed Funds rate.

Our 9,000  S&P 500 index target assumes a 23x multiple of 2027 S&P earnings with the 10-year rate below 4%. Every 25bp change in the 10-year impacts the theoretical S&P target multiple by one point. It’s important to note that the 30-year average S&P forward multiple of 17x is no longer relevant due to the enormous reduction in the corporate tax rate in 2017. We estimate that the rate reduction increased the sustainable multiple from 17x to 21x due to superior after-tax returns on invested capital which increases the sustainable growth of earnings. In fact, since 2018 the S&P forward multiple has averaged 21.5. We estimate that a premium multiple of 23x is warranted this year due to low interest rates and superior earnings growth projections due to AI productivity gains. We see the biggest risk to our 9,000 target to the upside as 2027 EPS estimates continuously rise with estimates up over 14% already since the beginning of the year.