Lets then also admit my own aim here to offer value and….to signal competence —Any difference then? Our strategy is directly invested, its performance transparent, and we refrain from making hollow predictions gazillion years into the future. Rather my goal here is to tell you what we look at when we make informed decisions based on our agentic system NINA for our own fund, and the things you might want to look at as well. The signals we look at have been validated by NINA.

TL:DR

While I am happy that NINA’s strategy closed November with a solid 7.4% gain, the reality is that while the returns feel good, the macro backdrop casts a more complicated shadow. In fact a lot of our signals are flashing bright red. Markets and fundamentals can dance out of sync for ages, which is why we weigh both hard data and behavioral quirks, staying firmly in the game while managing the ever-present risks.

Today’s landscape is one of intriguing contradiction: strong growth, stable housing, resilient labor, and yet uncomfortably persistent inflation lurking just close enough to matter. Credit spreads at their lows won’t stay low forever. If inflation heats up, inflation risk premia reprice, policymakers may tighten, and suddenly the once-invincible market run could face turbulence. Moreover the fiscal put has replaced the FED put, which is a more tricky road to want to maneuver, and how much of that put has already been priced in? NINA, our AI chief strategist has a simple approach: keep a foot on the accelerator, but hover the other over the brake. The point is not to know the future, but to stay adaptable in the present. So what do we look at now?

1. Inflation is key these last weeks…

…and beyond. As stated before, the US economic sea seems 𝐝𝐞𝐜𝐞𝐩𝐭𝐢𝐯𝐞𝐥𝐲 𝐜𝐚𝐥𝐦. U.S. growth has surpassed conservative forecasts, and near-historic low jobless claims signal a resilient labor market. Strong housing sentiment underpins the broader macro narrative. Despite distortions from hurricanes and strikes, doomsday bettors may need to wait a bit longer.

Yet, the lurking wildcard remains 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧. Core PCE stands at 2.8% year-over-year, balancing on the edge between stable and simmering. Even with the fiscal put in place next year, if inflation increases again, assuming the FED remains independent, there will be little room for further support. It is going to be very hard to keep the bond market satisfied then and there is a real chance the fiscal put will be void. Equities, Housing, and risk takers in general will bear the brunt.

The graph below shows the aggregate analysis scores of NINA for core inflation and monetary policy. Notably, the inflation trajectory peaked in October 2023 and has been declining since. We are not yet in the danger zone, but the next core PCE above 2.9% could even prevent the FED from cutting rates. Though the chance of spooking the market might be too high. The monetary policy score looks to also start to peak around this stage.

Last week we got labor data, so that’s out of the way and gave no strong reason not to cut yet. Yesterday we saw a stubborn core CPI at 3.3%, mostly due to shelter which went up by 4.7% YoY in November (less than the 4.9 %YoY reading of October), and we have the upcoming PPI print. But the core PCE release is critical for the December FED meeting. The inflation path will be key for 𝐛𝐨𝐧𝐝 𝐦𝐚𝐫𝐤𝐞𝐭 𝐬𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 in 2025 under the new administration. And bond market stability will be key to equity market multiple expansion and with a lag even earnings growth.

So?

2. Monetary Policy: Walking the Tightrope

Federal Reserve Chair Jerome Powell's cautious stance reflects a delicate balancing act. While supporting economic growth, the Fed remains vigilant against inflationary pressures. Powell's indication of a slowing in the pace of rate cuts or one can interpret it as maybe adopting a one-cut-every-other-meeting approach shows the uncertainty around the expected impact of Fiscal policies ahead. While the market has made up its mind on the fiscal put, the FED has not.

Federal Reserve officials exhibit diverse views, adding complexity to the monetary policy outlook. For instance, Waller with a hawkish reputation has expressed a dovish bias, while Kugler expresses concerns about supply shocks and immigration policy impacts and Musalem suggests considering slowing rate reductions. This internal diversity within the Fed underscores the nuanced approach required in monetary policy.

Strong forward GDP projections (around 3.0% for Q4) confirm that growth has more puff in the sails than many expected. This helps explain why markets have tolerated the idea of less aggressive rate cuts. Solid economic footing encourages policymakers to slow down, not rush.

At the same time, persistent inflation and the specter of supply-side shocks—from tariffs to immigration restrictions—could destabilize expectations. Inflation’s tyranny is subtle: if it creeps upward, equity valuations face a reevaluation, and credit spreads could finally widen. None of this happens in a vacuum. These crosscurrents represent real forces, pushing and pulling asset prices.

We must also consider that a “fiscal put”—the expectation of government stimulus—might be already baked into current valuations. But what if that put isn’t as bottomless as hoped? Heavy deficits and a watchful Fed might leave less policy firepower in reserve than investors assume, setting the stage for sudden shifts in sentiment down the line.

3. US-EZ Divergence

Between the Eurozone and the US, policy divergence is emerging. The Eurozone can be expected to maintain a lower rate environment compared to the US, influenced by differing economic recoveries and policy responses. This divergence is reflected in the yield curve movements and global trade dynamics. And in turn this will keep pressure in the EURUSD currency dynamics, in favor of the US Dollar.

As shared in our report: https://ciodesk.argan.ai/p/america-first-20-return-of-the-fiscal, the strong dollar can exert downward pressure on growth. Looking at the S&P500 companies, more than 40% of aggregate earnings come from non-dollar buyers. We have seen this in 2022, a strong dollar can weigh on earnings. On the other hand, a robust dollar places downward pressure on dollar-denominated commodities, impacting industries tied to raw materials, which in turn somewhat dampens exogenous inflation pressures. Note the word exogenous.

For our Argan Agentic Strategy, this is a double-edged sword. A strengthening dollar boosts portfolio returns from our U.S. holdings, but it negatively affects some of those same portfolio companies' earnings. Our previous estimate for the Euro to remain between the 1.05 and 1.09 levels on the medium-term, remains largely true. It has come down slightly towards the 1.04-1.08 range. For a broader set of outcomes, see the graph from our previous report below.

4. Credit Market Volatility: The Calm Before the Storm?

Credit markets, meanwhile, remain in their blissful honeymoon phase, with spreads hugging historic lows. But honeymoons end. If inflation risk premia reprice and growth expectations adjust, credit could lose its cool. Credit spreads at these levels do signal complacency in the bond market.

In the graph below we show the cyclical nature of the trend in credit spreads. A trend from which we are coming out of an almost 2 year sliding down downwards towards historically low levels. For NINA, this is a key data point to watch. The trend has already reversed slightly. The fundamental agents of NINA that are built to interpret this through the lens of theory, point to risk we mentioned previously. Any uptick in inflation or economic uncertainty could accelerate the trend reversal significantly, leading to increased volatility. While being short vol has paid off, will it continue to pay off in the future. Here is our philosophy like broken record: rather than predict the path, adjust to it.

The Final Word: Embrace the Contradiction

We stand at an intersection of strong growth and stubborn inflation, of market optimism meeting policy caution, and of expected fiscal stimulus priced in by the market. Given as an example: credit spreads can’t compress forever, and eventually, something’s got to give. Our stance is unapologetically realistic: remain engaged in the market, but acknowledge the crosscurrents and be ready to pivot. Looking at our returns of 7.4% in November, you might think that NINA is extremely positive. The truth is that the quant score of the system is almost 4 times lower than the beginning of 2024 and the outlook is not all that great.

Still, this narrative isn’t about predicting some far-off future. It’s about understanding today’s dynamics and staying agile. By focusing on for example: inflation, monitoring credit spreads, dollar strength and keeping an ear to policy signals, we stay prepared for whatever comes next. In this environment, that’s as good as it gets. An older and Weisser CIO I worked with, and learned a lot from, told me look at investors portfolio rather than their story to understand what their view is on the market.

So here is where we stand, we have a small portfolio of companies, less than 2% of the MSCI World, with roughly similar regional exposure. These are biased towards quality, deemed by NINA to be in secular long term trends, and are deemed by NINA to be able to withstand both headwinds in real yields as well as economic slowdowns in terms of their earnings growth. On top of that we have synthetic exposure to technology, and a hedging risk system able to step in when multiple expansions are threatened (this happens before EPS growth is hurt). We add gold and other hedging assets from time to time to safeguard the portfolio and add orthogonality when our gold analyst agents see the right signals, which is unfolding again. That’s it.

Look we do have estimates of what various equity markets can be expected to do, for example we expect roughly another 10% until mid year in the SPX index, based on an EPS growth of 6% and multiple expansion of roughly 3%. But really if in Jan we learn that inflation risk premia are underpriced, as is very possible, these numbers are changed, so look at the signals don’t bet on the 2025 annual outlook. This is not a 2025 annual outlook.

argan.ai: Your Partner in Navigating Complexity

This was an in-depth macro analysis, based on the macro intelligence engine of NINA (Novel Network of Investment Agents), the Agentic system we made at argan.ai.

Starting May of this year, the strategy derived from NINA for the Argan Agentic Fund went live and has returned ~32% (Until Nov). Our older system, prior to NINA, has a model portfolio going back to 2021. Including its performance would put the YTD results at 37.6% until Nov 2024, with a long-term annualized vol of 10.4%.

At Argan.ai, our philosophy is straightforward: we put our money where our insights are. We're not just observers; we're participants in the markets we analyze.

Feel free subscribe for future insights or to reach out to me at Reza@argan.ai for any info on the Argan Agentic Fund or research enquiries.

Legal Disclaimer

This communication is provided by Argan Technologies B.V. concerning the Argan Agentic Fund ("Fund"), an alternative investment fund under the Dutch Financial Supervision Act (Wft). The Manager is exempt from obtaining an AIFMD license and is not supervised by the Netherlands Authority for the Financial Markets (AFM) or the Dutch Central Bank (DNB).

The information herein is for informational purposes only and does not constitute an offer to sell or a solicitation to buy any securities or investment products. Investing in the Fund involves significant risks; past performance is not indicative of future results. Potential investors should read the Information Memorandum (IM) and consult their legal, financial, tax, and other advisors before making any investment decisions.

The Manager and its affiliates disclaim any liability for loss arising from reliance on this information. This communication is intended for residents of the Netherlands and is governed by Dutch law.

That's right—if you've dipped your toes into ETFs, chances are you've got a sprinkle of NVIDIA in your portfolio. And even if you haven't, unless you've hedged all the risk factor exposures, you're probably indirectly exposed as well. So, let's dive into the company prior to the earnings release, as everyone and their neighbor will be doing. But there is a twist: we'll let NINA crunch the numbers while I bask in the glory. AI predicting the future of AI? How meta!

NVIDIA Riding the AI Wave

As we wrap up 2024, the global investment landscape feels like a high-stakes poker game—full of bluffs, surprises, and the occasional royal flush. The U.S. economy is flexing its muscles with robust consumer spending, China is shuffling its fiscal deck to stabilize markets, and geopolitical tensions are the jokers nobody asked for. Amidst it all, technological innovation—especially in artificial intelligence—isn't just another card trick; it's reshaping our global economy. While the short-term impact might be overhyped, I firmly believe the long-term effects are the ace up our sleeve.

This week, we're zooming in on one company and how NINA sizes it up. For us, long-cycle secular trends and the trailblazers dominating those fields are the compass guiding our investment choices, whether retail investors are all on board or not. In an era where AI and cloud computing have graduated from buzzwords to business essentials, and even to words that turn away investors, NVIDIA has crafted an ecosystem where it can thrive.

On the macro level, a "higher-for-longer" yield environment—driven by positive economic surprises, growth expectations, inflation jitters, and geopolitical uncertainties—sets the stage for a bumpy ride. Companies like NVIDIA are no strangers to this volatility.

TL;DR: On the macro side, policies affecting economic growth, inflation, and yields continue to toss and turn NVIDIA's valuation and multiple growth. On the micro side, trade tensions and the easing of regulatory and tax burdens play tug-of-war with earnings growth. Balancing these factors and considering the company's fundamentals, NINA projects solid earnings per share (EPS) growth over the next 5-7 years (30x PE and EPS of approximately $8.4). Discounting this back to a one year horizon would give us an approximate return of 17%. Combined with high quality fundamentals make NVIDIA also resilient in tougher economic times, we continue to favor it, regardless of what the market does after the earnings call or the bright future of small/mid caps. NINA also gives a nod to Astera Labs as an intriguing alternative for those that dont like megacaps. Below, we delve into the detailed reasoning—based on NINA's analysis, edited by yours truly to keep us both sharp.

1. Macro Trends Driving NVIDIA’s Growth

Hyperscale CapEx Surge

The world's leading cloud service providers—Amazon Web Services (AWS), Google Cloud, Microsoft Azure, Meta, and Oracle—are significantly ramping up their capital expenditures. In the third quarter of 2024, the top four hyperscalers increased their CapEx by 17% quarter-over-quarter. Moreover, analysts are consistently issuing upwardly revised CapEx forecasts.

NINA’s Estimate: Projected growth among the big five in this space is expected to continue with another 11% to 12% for next year. Translation: The cloud is pouring money, and NVIDIA is dancing in the rain. 

Hyperscale capex? Think of Hyperscale CapEx as the cloud giants' shopping spree for data centers and networking infrastructure. These investments are crucial for supporting AI workloads that require massive computational power and storage. It's like building skyscrapers for supercomputers—with more circuits and fewer elevators.

Cloud Demand for GPUs

Over the past twelve months, bookings for AWS, Google Cloud, and Microsoft have grown by 28% year-over-year. This acceleration underscores the escalating demand for AI-powered cloud services. The synergy between cloud computing and AI is creating a virtuous cycle. Enterprises leverage cloud platforms to deploy AI solutions without hefty on-premise infrastructure investments. NVIDIA's GPUs are at the heart of this transformation. By enabling scalable AI solutions, NVIDIA empowers businesses to innovate rapidly. This demand drives cloud providers to invest more in GPU-equipped servers, benefiting NVIDIA's sales. 

2. NVIDIA’s Core Metrics

Revenue Trends

NVIDIA's revenue trajectory is nothing if not impressive, which understandably makes investors anxious. In calendar year (CY) 2023, the company reported revenues of $61 billion. Projections estimate this figure will more than double to $124 billion in 2024 and reach $180 billion in 2025.

Revenue Breakdown

• Data Center: Approximately 44% of revenues, primarily from cloud vendors.

• Consumer Internet: 27% of revenues.

• Enterprise: 28% of revenues, with expectations of increased contribution as AI adoption grows.

Gross Margins and Operational Efficiency

NVIDIA's gross margins have been stable, and we expect them to remain so:

• 2023 Gross Margin: 73.6%

• Projected FY2024 Gross Margin: 74.8%

This stability is crucial in the technology sector, where margins can be as volatile as the latest meme trends. It is also something NINA looks for as an indicator of quality, as is explained below.

Operating Income Growth

• Operating Income in 2023: $33.6 billion

• Projected Operating Income in 2024: $77.8 billion

Stable gross margins indicate strong pricing power and cost control. For investors, this suggests NVIDIA can maintain profitability even as it invests heavily in research and development (R&D) and scales its operations. It's like having your cake and eating it too, without worrying about the calories.

3. The Future of AI and Enterprise

Enterprise AI Adoption

Currently, we estimate that less than 32% of NVIDIA's data center revenue is linked to enterprise AI, but this proportion is expected to grow over time. Enterprises are increasingly deploying AI to enhance operations, customer experience, and decision-making. It's like giving businesses (like us) a turbo boost in the race to the top.

NVIDIA's NIM simplifies AI deployments and significantly reduces deployment time. For example, for the extraction of data from PDF’s I can tell you from experience that the below graph, although it looks quite technical, is in fact quite a simplification of the workflow using a NIM:

Why is this significant? By lowering the barriers to AI adoption, NVIDIA encourages more enterprises to integrate AI into their operations, driving demand for its hardware and software solutions. It's the ultimate matchmaking service for businesses and AI.

AI Ecosystem Value

Specialized research estimates suggest that the total AI processor market could reach $90 billion to $160 billion by 2030. Chips like those produced by NVIDIA, are expected to capture approximately two-thirds of this market. The AI processor market encompasses the hardware used to perform AI computations and the expected growth is driven by for example:

• Increased AI Adoption across industries such as healthcare, finance, and automotive.

• Technological Advancements leading to more powerful and efficient processors.

• Emergence of New AI Applications, Such as autonomous vehicles and personalized medicine.

4. Broader Economic Context and NVIDIA’s Position

The U.S. Economy: Resilient but under Pressure

Positive surprises have continued to emerge in the U.S. For example, retail sales grew at an annualized rate of +3.5% in Q4 2024, driven by robust consumer demand despite inflationary pressures. This growth is a testament to the resilience of household spending.

Thus, real yields have been on the rise. The 10-year Treasury yield climbed to 4.46% last week and now stands at 4.4%, significantly higher than its September lows. This reflects investor expectations of better than expected growth, prolonged inflation uncertainty, and less easing from the FED. See this article for more: https://argantechnologies.substack.com/p/america-first-20-return-of-the-fiscal.

This "higher-for-longer" environment, as well as inflation and rate volatility, constrain equity valuations. Most of the yield rise lately seems to have stemmed from positive economic surprises and growth expectation adjustments, but inflation signals have been deteriorating since July—a topic we'll delve into next week. We can see the effect of real yields in the graph below, where the trend in the right chart of the rise in real yield significantly outpaces that of the bond markets inflation expectations.

How this affects NVIDIA? If we consider price to be a multiple of earnings, then this primarily affects the behavior of this multiple—whether it can grow or needs to shrink. NINA's analysis takes this effect into account, adjusting multiple growth expectations as we get more clarity on the rate trajectory and policy impacts.

I get asked the question on how rates affect multiple expansion, so below is a short example: Say we have Company A, which initially has an earnings per share of $5, a stock price of $100, and a price-to-earnings ratio of 20 (5x20 = 100). Say the multiple was based on a rate of 5%. When interest rates rise, the discount rate increases from 5% to 6%, making future cash flows less valuable in present terms. This causes investors to lower the multiple they're willing to pay for earnings, contracting the P/E ratio from 20 to 16. As a result, Company A's stock price drops to $80, calculated by multiplying the $5 EPS by the new P/E ratio of 16. This 20% decline in stock price, solely due to multiple contraction following interest rates, rather than fundamental earnings growth expectations. Companies like NVDA have high growth expectations that we extrapolate for years in the future and are as such are sensitive to bond yields. 

China’s Strategic Economic Interventions

China is not an insignificant factor for NVIDIA's performance, so let's examine some key events there as well.

Debt Swaps and Fiscal Stimulus: China's issuance of ¥224 billion in special refinancing bonds in November is part of a ¥2 trillion initiative aimed at reducing local government hidden debt and boosting economic activity. These measures enhance liquidity for local governments and foster reinvestment in critical sectors.

Housing Market Stabilization: Beijing's policies, such as reduced mortgage rates and tax incentives, aim to stabilize urban housing markets. While the long-term outlook remains uncertain, these interventions are beginning to halt declines in tier-1 and tier-2 cities.

Trade Dynamics: China reduced or eliminated export tax rebates for certain products starting December 1. This move may address complaints from trade partners regarding overcapacity and government subsidies. The timing coincides with positive economic data and Chinese President Xi Jinping’s summit visits in South America. These rebate cuts could be intended to improve relations with trade partners ahead of potential renewed trade conflicts with the U.S. A better position for China is a good start for a less bloody trade conflict.

5. Risks and Market Sentiment

Valuation Concerns

At a price-to-earnings (P/E) ratio of 39x at the time of writing, NVIDIA is trading below its 2021 highs of over 60x and has corrected from the same lofty valuations earlier in 2023. While this suggests that the stock isn't overvalued relative to its historical performance, it's essential to consider broader market dynamics. 

Relative Comparison with S&P 500

• NVIDIA's P/E Relative to S&P 500: 1.65x

• Current Discount: 19% below the median

NVIDIA's strong growth prospects and market position may justify its current valuation, but the risk of overall market multiple contraction remains.

Deceleration Risks

Despite strong growth, NVIDIA's revenue growth rate is decelerating. The year-over-year revenue growth is expected to decrease by 48% for Q3 25. Momentum indicators help investors gauge the strength of a trend. A decelerating growth rate might signal a potential slowdown, prompting investors to reassess their positions.

New Entrants, example: Cerebras

Cerebras has positioned itself as a serious contender in the AI chip market with its revolutionary Wafer-Scale Engine (WSE) technology:

• WSE-3 Chip: Boasts 900,000 AI-optimized cores and 4 trillion transistors, making it the largest commercially available AI processor.

• Performance Claims: Cerebras claims its WSE-3 outperforms NVIDIA's H100 GPU by a factor of 210 in carbon capture simulations.

• Technical Superiority: The company's chips offer significantly more cores, on-chip memory, and memory bandwidth compared to traditional GPUs.

Cerebras' Financial Performance

• First Half of 2024 Revenue: $136.4 million, a significant increase from $8.7 million in the same period of 2023.

• Net Loss: $66.6 million for the first six months of 2024, an improvement from the $77.8 million loss previously.

NVIDIA's Competitive Edge

While Cerebras presents a formidable challenge, NVIDIA maintains several advantages:

1. Market Dominance: NVIDIA's GPUs are the industry standard for AI workloads, with a well-established ecosystem and broad software support.

2. Continuous Innovation: NVIDIA continues to push the envelope with new technologies and improvements.

3. Diversified Product Line: NVIDIA offers a wide range of products beyond AI chips, reducing vulnerability to competition in any single area.

4. Financial Strength: NVIDIA's strong financial position allows it to invest heavily in R&D and marketing, potentially outpacing smaller competitors. And these companies have hefty M&A capabilities.

Conclusion

NVIDIA's strategic positioning in the AI and cloud computing landscape underscores its potential for sustained growth. The company's technological leadership, stable margins, and expanding market opportunities present a compelling case for continued success. While valuation concerns and revenue growth deceleration pose risks, the overall market trends favor NVIDIA. The significant increase in hyperscale CapEx and the burgeoning demand for AI solutions in enterprises suggest that NVIDIA is well-placed to pioneer the data-centric future.

For investors seeking exposure to the AI and cloud computing sectors, NVIDIA offers a blend of strong fundamentals and growth potential. But remember, investing in companies involves risks, both macro and micro risks, and it's essential to conduct thorough due diligence. This is not investment advice—just your friendly neighborhood analysis and a look under the hood at how AI can analyze AI!

argan.ai: Your Partner in Navigating Complexity

This was an in-depth company analysis, based on the company intelligence engine of NINA (Novel Network of Investment Agents), the Agentic system we made at argan.ai.

Next week, we'll dive deeper into the macro landscape and how we view risk assets in that context.

Starting May of this year, the strategy derived from NINA for the Argan Agentic Fund went live and has returned ~23% (Current Estimate). Our older system, prior to NINA, has a model portfolio going back to 2021. Including its performance would put the YTD results at 35% with a long-term annualized vol of 10.4%.

At Argan.ai, our philosophy is straightforward: we put our money where our insights are. We're not just observers; we're participants in the markets we analyze.

Don't miss out on future updates. Subscribe now if you liked this article.

Feel free to reach out to me at Reza@argan.ai for any info on the Argan Agentic Fund or research enquiries.

Share

Legal Disclaimer

This communication is provided by Argan Technologies B.V. concerning the Argan Agentic Fund ("Fund"), an alternative investment fund under the Dutch Financial Supervision Act (Wft). The Manager is exempt from obtaining an AIFMD license and is not supervised by the Netherlands Authority for the Financial Markets (AFM) or the Dutch Central Bank (DNB).

The information herein is for informational purposes only and does not constitute an offer to sell or a solicitation to buy any securities or investment products. Investing in the Fund involves significant risks; past performance is not indicative of future results. Potential investors should read the Information Memorandum (IM) and consult their legal, financial, tax, and other advisors before making any investment decisions.

The Manager and its affiliates disclaim any liability for loss arising from reliance on this information. This communication is intended for residents of the Netherlands and is governed by Dutch law.

Investors are facing a combination of opportunities and challenges, with U.S. equities appearing buoyant in the near term and bonds under pressure. However, the lurking risks of inflation and dollar appreciation should not be overlooked. Let's have a closer look into the details with the help of our Chief (AI) Strategist NINA.

Prefer listening over reading? Listen to the podcast version where we discuss this article.

So, grab your coffee — or make it a double espresso — as we delve into the forces reshaping market dynamics.

1. Macro: The Fiscal Party’s Back, But at What Cost?

Fueling the Economic Engine….with Dirty Diesel?

Trump's second term heralds a clear shift towards expansionary fiscal policy. According to NINA, our agentic investment system, deficit spending is expected to be about 0.5-0.6% of GDP in the base case. This isn't just a gentle nudge for growth—it's a spending-fueled boost that could initially push GDP upwards, but has a less rosy medium-term impact, potentially shaving off roughly 20-30 basis points of GDP by Q3 2025.

Historically, fiscal expansion injects cash directly into the economy through, for example, military spending, subsidies, or tax cuts. This surge typically elevates GDP as consumer and business confidence rises. It’s like boosting an economy on an energy drink: short-term zing, but watch for the crash.

Inflation and the Fed’s Tightrope Walk

Now, it would be great if fiscal expansion came with no side effects, but economics rarely works that way. This push for growth brings back an uninvited guest: inflation. Increased government spending drives up costs, rippling across prices. As more dollars chase a limited number of goods, inflation begins its upward climb. And with Trump's immigration policies tightening labor markets, inflation gets a second wind as fewer workers are available to meet rising demand.

Here's the silver lining: inflation can be self-regulating if central banks respond appropriately, especially from a monetarist perspective. We don't anticipate an expansionary monetary policy to accompany Trump's spending plans. NINA estimates fewer rate cuts, which should help keep the M2 money supply in check.

Why M2?

NINA pinpoints this as a critical economic relationship affected by Trump's policies and the Fed's balancing act. M2 emerged as one of the key players from the large set of hypotheses the system is built out of. The importance of a hypothesis is estimated through rigorous quantitative testing, with causal associations baked in. 

In the chart below we depict the relationship between the year-on-year change in core PCE inflation and the acceleration of the M2 Money supply. It is clear that with a lag the M2 money supply acceleration seems to be an important driver of inflation. Think of it as one of inflation’s secret best friends, which is not new to the monetarist readers out there.

A Quick Sidebar on M2 and Core PCE

• M2 Money Supply: This is a measure of the money supply. In simple terms, M2 reflects the amount of money available in both cash and savings that can be easily accessed and spent. It’s adjusted for seasonal factors to give a more accurate picture of money trends.

• Core PCE Price Index: The Federal Reserve's preferred inflation gauge. Think of Core PCE and Core CPI as two different ways to measure how prices are changing. They're like two people shopping at the same store, but with different shopping lists and ways of adding up their bills. Core PCE is like a shopper who looks at everything in the store and changes their list often based on what's popular. They also include things their friends might buy for them. Core CPI is more like a shopper who sticks to a specific list of items they always buy themselves, focusing more on housing costs. Because they shop differently, they might come back with different ideas about how prices are changing. The Federal Reserve prefers to look at Core PCE because of its potential to paint a better overall picture of price changes in the economy.

As said, the expectation is that expansionary fiscal policy without monetary accommodation should keep inflationary pressures in check.

Immigration Policies and the Labor Market

Trump's stringent immigration policies are a double-edged sword. Initially, the reduced labor supply could lower unemployment rates. But those pesky second-order effects can't be ignored. Over time, a slower-growing labor force may mean less investment, which eventually chips away at economic growth.

Our estimate? We anticipate an inflation effect between 0.3% and 0.5%, of which a significant portion is coming from the expected tariffs discussed below.

NINA’s projections suggest the Fed may cut rates at most three times in 2025, a delicate dance as fiscal policies continue to push inflation around. Just remember, NINA’s numbers change daily with new data—so consider this a snapshot rather than a prophecy.

2. Global Trade and Tariff Turbulence

Trade Wars: The Sequel

If you thought the first Trump term was tough on global trade, brace yourself for round two. Trump 2.0 proposes even higher tariffs, with China in the crosshairs and the EU, Mexico, and Vietnam not far behind. U.S. trade policies under this administration could push weighted average tariffs on Chinese goods up to 22%, with an 8% total tariff possible for other countries according to NINA. It's like upping the stakes in a high-stakes poker game where everyone's bluffing and nobody wants to fold. But, clearly the coming administration firmly beliefs that this will be a source of income to reduce the budget deficit, with all the tax reductions planned ahead.

Tariffs Fueling Inflation?

Inflation rises when tariffs make imports costlier, leading to price increases for goods sourced from overseas. With additional fiscal stimulus pumping more disposable income into the economy, demand surges, further pushing up prices. NINA estimates that tariffs alone are expected to boost inflation by about 0.3 percentage points—a short-term effect but enough to make CFOs have another look at their pricing strategies.

Elon Musk: The Wildcard

The agentic analysts brought up an intriguing wildcard: Elon Musk. Having played a pivotal role in the elections and now a key ally of Trump, Musk adds an unpredictable element to the equation. With substantial business interests in China, he might serve as an informal mediator between the two superpowers. We already know he and Vivek Ramaswamy will run the new government agency DOGE. Could he be the bridge over troubled waters, or will his tweets create more waves? It's a subplot worth watching.

Source: The New York Times

3. Dollar Strength and Its Economic Impacts

The dollar has strengthened by a couple of percentage points in recent weeks, and expectations are that it will maintain this momentum due to the chain of favorable economic fundamentals, including fiscal expansion and higher Treasury yields. While this can benefit importers, it poses challenges for U.S. exporters as their goods become less competitive overseas.

A stronger dollar often correlates with capital inflows into the U.S., driven by higher interest rates and economic optimism. However, these same forces can exert downward pressure on growth. Moreover, for S&P 500 companies, more than 40% of aggregate earnings come from non-dollar buyers. As witnessed in 2022, a strong dollar can weigh on earnings. Additionally, a robust dollar places downward pressure on dollar-denominated commodities, impacting industries tied to raw materials, which in turn somewhat dampens inflation pressures.

For our Argan Agentic Fund, significant USD/EUR exposure is a double-edged sword. While a strengthening dollar boosts portfolio returns from our U.S. holdings, it negatively affects some of those same portfolio companies' earnings. As of this week, NINA estimates the euro to remain between the 1.05 and 1.09 levels on the medium-term. For a broader set of outcomes, see the graph below.

So, What Does This All Mean?

A Trump-Driven S&P 500 Rally

Trump's re-election is anticipated to drive another round of equity market exuberance, fueled by deregulation and favorable tax policies. NINA suggests a potential 10-15% return for the S&P 500 by mid-2025 from the current levels, based on a snapshot base case price-to-earnings ratio of 26.5x and an EPS of $253. Lower regulation and tax relief are expected to boost investor confidence and fundamentals, although underlying risks remain. These risks can derail the base case, especially as we are still in an environment of inflation volatility. The effects ripple through bond volatility, higher for longer/less rate cuts, and ultimately lower risk premia.

With inflation expectations volatile, an expansionary fiscal stance, and a rising budget deficit that could bite the economy in the long term, bonds may present stormy waters yet again. And for those who were waiting for the return of the 60/40 portfolio with a vengeance, the wait continues. Sectors like technology, energy and financials, as well as small to mid-sized businesses, stand to gain from deregulation and fiscal stimulus. Meanwhile, short-duration bonds and scarce assets can offer some safety against inflation volatility. Though remember gold loses its gleam in periods of accelerating growth and real yields, albeit short-lived and manufactured. I would not be surprised to see Treasury yields climb another 20 basis points in the near term before policy impacts the growth picture negatively.

The strong dollar calls for caution in commodities and emerging market investments, where currency effects could weigh heavily on returns.

As always, agility is key. In these dynamic markets, staying nimble could make all the difference.

argan.ai: Your Partner in Navigating Complexity

This was our topical article, based on the analysis made by NINA (Novel Network of Investment Agents), the Agentic system we made at argan.ai.

Next to more upcoming topical reports, we're excited to announce that we'll start presenting biweekly Macro and Markets views from NINA. Here, we share our biweekly market views as generated by our system—the same views that shape the portfolio we invest in.

Starting May of this year, the strategy derived from NINA for the Argan Agentic Fund went live and has returned 23%. Our older system, prior to NINA, has a model portfolio going back to 2021. Including its performance would put the YTD results at 35% with an overall annualized vol of 10.4%.

At Argan.ai, our philosophy is straightforward: we put our money where our insights are. We're not just observers; we're participants in the markets we analyze.

Don't miss out on future updates. Subscribe now to stay ahead of the curve.

Feel free to reach out to me at Reza@argan.ai for any info on the Argan Agentic Fund or research enquiries.

Subscribe now

Share

Legal Disclaimer

This communication is provided by Argan Technologies B.V. concerning the Argan Agentic Fund ("Fund"), an alternative investment fund under the Dutch Financial Supervision Act (Wft). The Manager is exempt from obtaining an AIFMD license and is not supervised by the Netherlands Authority for the Financial Markets (AFM) or the Dutch Central Bank (DNB).

The information herein is for informational purposes only and does not constitute an offer to sell or a solicitation to buy any securities or investment products. Investing in the Fund involves significant risks; past performance is not indicative of future results. Potential investors should read the Information Memorandum (IM) and consult their legal, financial, tax, and other advisors before making any investment decisions.

The Manager and its affiliates disclaim any liability for loss arising from reliance on this information. This communication is intended for residents of the Netherlands and is governed by Dutch law.