Eye On The Market with Michael Cembalest

Episode: Fair Shakes
Date: September 2, 2025

Episode Overview

In this episode, Michael Cembalest delivers a comprehensive assessment of US earnings, economic trends, and market dynamics against the backdrop of what he describes as one of the "broadest policy shifts since Roosevelt." He examines the impact of recent Congressional legislation, tariff expansions, and regulatory changes, as well as the complexities of current media narratives around economic policy. The episode also dives into the evolving political landscape, including partisan mid-decade redistricting and Supreme Court cases that could reshape the balance in the House of Representatives—and ultimately, electoral math.

Key Discussion Points & Insights

1. U.S. Earnings and Economic Assessment

(00:24–06:45)

• Q2 Earnings — Stronger Than Expected:

  • Initial Q2 earnings expectations dropped from ~11% to 4%, but actuals came in back at 11%.
  • "The MAG7 stocks are continuing to grow. Earnings at around twice the pace of the rest of the market." (02:00)
  • European profitability remains flat: “Wake me when European profitability wakes up.” (02:20)
  • Large-cap profit margins are “pretty resilient,” led primarily by tech—with some gains in industrials and consumer discretionary sectors.
  • Recent corporate tax provisions provide incentives via time-shifting, not outright cuts, potentially boosting cash flow by 3-4%.

• Production vs. Consumption:

  • S&P 500 performance is more a reflection of the production side of the economy than consumption, which explains some apparent disconnects between GDP (which is 70% consumer-driven) and earnings patterns.

• Profit Margin Trends:

  • Tech sector margins remain “sky high,” but there are early signs of improvement in other sectors.

2. Media and Political Narratives

(06:45–13:00)

• Bias in Economic Media Coverage:
  • Cembalest recounts an informal study from 2019 comparing coverage across major news shows with economic reality, finding only three stories out of hundreds referencing positive economic news during an up-cycle.
  • “I remember thinking at the time, this is really skewed reporting because … isn’t there room for at least some news reports on the positive economy?” (09:40)
  • Acknowledges President Trump’s assertion that his economic accomplishments receive little positive media attention, admitting there’s “a point on a couple fronts.”
• Politicization of Economic Data:
  • Dismissal of the Bureau of Labor Statistics head heightened politicization, but errors in data are attributed to methodology, not malfeasance.

3. The Role of AI and Substantial Policy Changes

(13:00–21:30)

• AI-spending Boom:

  • Tech CapEx attributed to AI is now between 25–33% of real GDP growth contribution over recent quarters.
  • “The magnitude of this technology capital spending boom can’t really be understated in terms of its impact on the economy.” (13:55)
  • Hyperscalers like Meta, Microsoft, Alphabet, and Amazon are devoting a record share of revenues (up to 65% for Meta) to CapEx and R&D.

• Policy Shifts Parallel to FDR Era:

  • Many policy changes are cited:
    • Tariffs returning to early 20th-century levels
    • Complete border shutdowns in response to a migrant surge
    • Deregulation in response to prior regulatory expansions
    • The newly passed reconciliation bill redistributes $5 trillion over 10 years with a complex mix of “Thatcherite pro business incentives,” nationalism, Reagan-era militarism, and a sharp aversion to the green economy.

• Safety Net Reforms and Social Impact:

  • Larger standard deductions and bonus benefits for working parents, while non-working individuals face stricter policies: “There’s a little bit of a giant Steinbeck outcome here.” (21:15)

4. Economic Indicators and Federal Reserve Dilemmas

(21:30–25:45)

• Growth Indicators:

  • Coincident indicators (Dallas Fed, Atlanta Fed, Conference Board) stable; leading indicators (ISM new orders, business optimism) showing emerging weakness.
  • “Keep that in the back of your head because that weakness is part of what the Fed is allegedly responding to in its debate about cutting rates.” (22:40)

• Inflation Trends:

  • Core PCE inflation stable at around 3%.
  • Core goods PCE and producer price inflation starting to rise, likely reflecting tariff effects.
  • “I wouldn’t say they never ease when these are rising, but they usually don’t ease when these are rising.” (25:20)

• Labor Market Deterioration:

  • Array of indicators (non-farm payrolls, % of small businesses planning wage hikes, job transition premiums, long-term unemployment) point to weakening, prompting potential Fed rate cuts.

5. Tariffs: Complexity, Implementation, and Uncertainty

(25:45–29:00)

• Ever-Expanding Tariff Regime:

  • Notably complex “derivative composition tariff” now requires importers to calculate steel and aluminum contents separately for customs calculations.
  • “This would make my head hurt if I was responsible for applying them in practice, but that’s what they’ve done. This is kind of like the full employment act for trade accounting professionals of 2025.” (26:50)

• Tariff Pass-Through Still Unclear:

  • Too early to know if US businesses or consumers will bear most costs, given inventory hoarding ahead of tariff deadlines.

• Tariff Revenues:

  • If maintained, tariffs amount to approximately $250–270 billion/year (about 0.8% of GDP)—material though not game-changing given US deficits.

6. Political Shifts: Redistricting, Supreme Court, and Census

(29:00–31:50)

• Partisan Redistricting:

  • GOP-led mid-decade redistricting in Texas and Florida under the guise of correcting census errors; Cembalest asserts the moves are clearly political: “The political reality appears to be that some of the redistricting that you’re reading about is being done for political reasons. Not a shocker.” (29:20)
  • Constitution does not prohibit mid-decade redistricting or partisan gerrymandering; in Texas, there are almost no constraints, while states like California face legal barriers requiring voter referenda.
  • Only Texas, Illinois, and Georgia possess similar latitude for redistricting.

• Supreme Court and Voting Rights Act:

  • The Supreme Court has ordered a rare re-argument focused on whether “majority-minority districts” required by the Voting Rights Act are constitutional.
    • “The last time this happened was Citizens United…after the reargument the court issued a sweeping opinion…” (30:40)
    • Between 44–60 Congressional seats may be in play, with potentially far-reaching impact.

• 2030 Census Impact:

  • Interstate migration trends threaten Democratic seat counts in the House and Electoral College.
  • “Current interstate migration trends will result in Democratic states losing seats … and GOP states gaining seats, Texas and Florida, four each.” (31:20)
  • A future Democratic presidential win could mean “12 fewer Electoral College votes” using 2024 benchmarks.

Notable Quotes & Memorable Moments

• On Policy Shifts:
  • “The biggest policy changes that have taken place in decades, arguably since FDR 90 years or so ago. But none of these things happen in a vacuum.” (14:30)
• On U.S. Media Polarization:
  • “We went through every nightly transcript for Cuomo Primetime, Anderson Cooper 360 … hundreds of stories, we found three that had any reference at all to the positive news that was prevailing at the time.” (09:10)
• On AI Spending’s Economic Impact:
  • “For the first time I can remember, the GDP growth contribution from tech equipment and software was higher than from personal consumption expenditures. That’s kind of amazing for the U.S. economy.” (14:30)
• On Labor Markets:
  • “There is a panoply of signals that you could look at that tell us that the labor markets are weakening … I don’t think they’re plummeting, but they’re weakening at a pace that would normally signal to the Fed that it’s time to cut rates.” (25:00)
• On Tariff Complexity:
  • “This is kind of like the full employment act for trade accounting professionals of 2025.” (26:55)
• On Immigration Detention:
  • “70% of the people that are held in ICE detention centers had no criminal convictions as of August of this year. And of the 30% that do have criminal convictions, a lot of them only committed minor offenses like traffic violations.” (28:45)
• On Gerrymandering and Census Manipulation:
  • “There’s nothing in the Constitution that says you can’t [do mid-decade redistricting]… Illinois and Georgia are the only other states in addition to Texas that have as much legislative freedom to operate here as Texas does.” (30:05)
• On Electoral College Math:
  • “If a Democrat won the same states as Kamala Harris did in 24, in the future that could entail 12 fewer Electoral College votes.” (31:27)

Important Timestamps

• 00:24–06:45 – Q2 Earnings & Sector Performance
• 06:45–13:00 – Media Bias & Data Politicization
• 13:00–21:30 – AI CapEx, Major Policy Shifts, Safety Net Reform
• 21:30–25:45 – Federal Reserve, Growth & Labor Market Indicators
• 25:45–29:00 – Tariffs: Implementation & Impact
• 29:00–31:50 – Redistricting, Supreme Court, Census, Electoral College Impacts

Conclusion

Cembalest paints a picture of an economy in transition, shaped by immense policy changes, technological investment, and shifting political strategies. He encourages listeners to approach headlines and official data with a critical eye, considering both the intentional and unintended consequences of sweeping reforms. Listeners seeking more granular data are pointed to his weekly online "Trump Tracker" for regular updates on policy impacts.