Small businesses are still negative, and the percentage of firms anticipating an improvement in the economic outlook (better sales) dropped to only 5% (a loss of 2 points). Overall, tying this report to other measures of business confidence suggests stability but little upward thrust. There is a modest improvement in hiring, but most manufacturing indices (e.g., ISMs) are mixed, inventories are not building and capital spending relative to profits is low by historic standards.
On this score, watch the potentially nascent rise in unit labor costs (payrolls), as productivity gains seem behind the sector. As well, the recent U.S. dollar strength and still-modest top-line growth exposes profit margins, which are at multidecade highs and are the Achilles' heel to (too high) second-half corporate profit growth expectations. With basically flat sales growth, it is hard to see business loosen its purse strings going forward. The volatility seen recently in the fixed-income markets when combined with the aforementioned challenging earnings outlook could limit market upside. My view is that the S&P 500 has 50 points to the upside and more than 100 points to the downside, an unfavoraborable reward vs risk. At the time of original publication, Kass was short SPY.