Good morning investors,
Small caps surge to new all time highs with the Russell 2000 up 1.1% Thursday, outperforming Nasdaq 100 by 4 percentage points in just five days, the second strongest relative start to any year on record. The Supreme Court could rule today on Trump's tariff authority with $150-200 billion in potential refunds hanging in the balance, creating binary risk for markets.
We await the December payrolls which is expected at 55,000 with unemployment falling to 4.5%, but productivity surging 4.9% annually. This would show an economy growing without hiring, great for margins, brutal for job seekers.
Opening Bell: Jobs Day Setup
Futures flat with Dow ($DIA ( ▲ 2.48% )) up 6 points while S&P ($SPY ( ▲ 1.92% )) and Nasdaq ($QQQ ( ▲ 2.11% )) hover unchanged ahead of dual catalysts. December payrolls at 8:30 AM expected to show modest 55,000 gain with unemployment edging to 4.5% from 4.6%, though New York Fed survey shows worker pessimism at 12-year highs.
Intel rises 2.5% premarket after Trump praised CEO Lip-Bu Tan, noting the government's 10% stake already generated "tens of billions" in four months. The 75% surge since August's CHIPS Act investment validates the turnaround thesis.
Small Cap Breakout Accelerating
Russell 2000 ($IWM ( ▲ 3.59% )) hitting fresh all time highs validates my conviction perfectly. The 4 percentage point outperformance versus Nasdaq 100 in five days marks historic rotation from growth to value. Breaking above 2021 levels creates price discovery potential after years trapped in range.
This isn't just January effect, it's structural catch-up trade beginning. With small caps trading at historic discounts to large caps while rates fall and domestic focus advantages them, the setup remains compelling. Years of underperformance created coiled spring now releasing.
Tariff Ruling's Binary Impact
Supreme Court decision on Trump's IEEPA authority could unleash chaos or relief. Online betting markets give just 30% odds of upholding tariffs, suggesting strike down likely. The $150-200 billion in potential refunds would boost retail and consumer stocks massively while crushing Treasury yields higher.
Many companies have been waiting on restocking decisions until clarity emerges. This could be a scenario where companies restock again, kickstarting the manufacturing cycle. Yet Trump would likely reimpose tariffs through alternative authorities, creating temporary relief before renewed pain.
Productivity Boom's Dark Side
Q3 productivity surging 4.9% annually while hours worked rose just 0.5% explains everything about this economy. Atlanta Fed projecting 5.4% Q4 GDP growth shows expansion continuing robustly, but without job creation. Companies achieve more with existing workers rather than hiring.
This Goldilocks scenario for Wall Street, growth without wage inflation, devastates Main Street. The disconnect between headline strength and household strain perfectly captured: economy doing more with less benefits investors, not workers seeking opportunities.
Nuclear Arms Race Intensifies
Meta's agreements with Vistra, TerraPower, and Oklo for Prometheus supercluster power needs shows AI's insatiable energy demands. The 6.6 gigawatts by 2035 exceeds New Hampshire's total demand, highlighting scale required for superintelligence ambitions.
Sam Altman's 4.3% Oklo stake worth $650 million creates interesting dynamics with OpenAI's CEO backing Meta's power supplier. TerraPower's 2032 timeline and Oklo's 2030 campus show nuclear becoming AI's critical infrastructure, not optional enhancement.
Corporate Round Up
Companies seeking legal advice after Trump's executive order tying buybacks, dividends, and executive pay to weapons delivery schedules shows real concern.
Johnson & Johnson striking deal to cut drug prices for tariff exemptions establishes precedent - comply with administration demands or face consequences.
General Motors taking $6 billion charge to unwind EV investments following Ford's similar move confirms sector retreat. The $4.2 billion cash charge for contract cancellations shows real costs of policy whiplash.
Paramount's Desperation Math
Paramount claiming WBD's cable assets worth $0 to make their $30 offer look superior to Netflix's $27.75 shows creative accounting. Pentwater Capital's 50 million shares backing pressure on WBD board suggests growing shareholder revolt despite board's unanimous Netflix support.
The Ellisons trying to make math look easy, but valuing profitable cable networks at zero strains credibility. Markets see through financial engineering - substance matters more than spreadsheet gymnastics.
Healthcare and Quantum Opportunities
UnitedHealth approaching $350 resistance with $380 gap fill potential aligns with my healthcare overweight thesis. The sector breakout continues as markets rotate.
Rigetti Computing's consolidation in the twenties after running from under $1 to $58 creates re-entry opportunity. Quantum computing theme has legs despite Google's emergence. My original sub-$1 call proved prescient, the pullback offers second chance after this consolidation.
Final Thought
Today brings rare market binary - Supreme Court tariff ruling creating instant winners and losers. A strike down unleashes $150-200 billion in refunds, rocketing consumer stocks while crushing bonds. Upholding creates different chaos as Trump's unpredictable tariff threats continue. Either outcome brings volatility.
The jobs report matters less than productivity data already revealed. Economy booming without hiring represents new normal where efficiency gains replace employment growth. Great for margins and Fed policy, devastating for workers seeking opportunity. This disconnect explains persistent pessimism despite headline strength.
Small caps leading convincingly confirms rotation thesis playing out perfectly. The Russell 2000's breakout to all-time highs after years of underperformance creates massive catch-up potential. Historic valuation discounts won't persist as money flows from crowded growth to forgotten value.
I continue to position for continued small cap outperformance with Russell 2000 breaking into price discovery mode.
Use any tariff ruling volatility to position strategically.
As always, feel free to reach out with questions about navigating today's catalysts.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.