From two cuts to a hike in five months… why Louis says the market is misreading this… the Bessent-Warsh playbook… how to be positioned before the pivot… how to catch a replay of yesterday’s event with Louis
At the start of the year, the CME Group’s FedWatch Tool showed traders pricing in two interest rate cuts for the year, with the first expected as early as April.
As I write on Thursday morning, expectations have shifted…
The FedWatch tool now shows a nearly 34% probability of a rate hike.
And that’s just the forecast for December. If we look out to April 2027, the odds of a hike surge to roughly 53%.
Source: CME Group
This is a staggering swing in market expectations in just five months. And it raises an obvious question for investors…
Is the market right?
Legendary investor Louis Navellier, editor of Breakthrough Stocks, doesn’t think so.
I’ll get to Louis’ argument in a moment. It has direct implications for how you should be positioned right now.
But first, let’s make sure we’re looking at the same chessboard.
How we got here
As a quick recap, Tuesday’s Consumer Price Index came in at 3.8% year-over-year – a three-year high. Wednesday’s Producer Price Index – the wholesale inflation reading – landed at 6.0%, the largest 12-month jump since December 2022.
In the wake of these red-hot prints, rate-cut expectations didn’t just fade – they collapsed. A rate hike has become the market’s expected next move.
This makes sense. Hot inflation data means the Fed can’t cut rates. And the longer that the data remain hot – and potentially, get hotter – the more logical the question becomes…
Is a hike the likelier next move?
The futures market is now responding “yes.”
But here’s Louis’ take from yesterday’s Breakthrough Stocks Flash Alert:
We should just take a step back and realize that we have 20% earnings growth with the S&P this quarter. Earnings are forecasted to be good for the remainder of the year.
Stocks are a great inflation hedge.
So, despite this news that has rattled the market with inflation – the CPI [on Tuesday] and especially the PPI [yesterday] – we are in a very good environment.
That’s not a denial of the hot prints. As I’ll show you, it’s just a conclusion based on a different reading of the same data and headlines.
Why Louis thinks the market is misreading the inflation picture
Those who are betting on rate hikes are treating this week’s inflation prints as evidence of a structural problem.
Louis is treating them as evidence of a temporary shock layered on top of a more manageable underlying trend – a critical distinction.
Let’s start with Louis on the source of the inflation:
We had this inflationary bubble from energy. We also have higher trucking costs and shipping costs from high diesel costs and jet fuel, et cetera.
That’s going to be rippling through all the costs of goods and services, and that’s apparently what showed up in the PPI [yesterday].
This is an important point that the rate-hike narrative glosses over…
The 6% PPI print isn’t a story about wages soaring or consumer demand running too hot. It’s a story about an oil shock triggered by the Iran conflict flowing through the supply chain – through diesel, jet fuel, trucking, shipping – and showing up in wholesale prices.
Energy-driven inflation is qualitatively different from the embedded kind. It has a ceiling – a potential resolution that the embedded variety doesn’t. And that resolution, as Louis noted yesterday, may be closer than the market thinks, in part given Iran’s own well-capping problem.
Here’s Louis:
[Iran] can’t really pump oil right now because the wells are backing up.
If they cap the wells, they won’t be able to restart them for months.
There was slick spotted in the Persian Gulf. We hope they’re not pumping the oil into the water because again, if you cap the well, you won’t be able to restart it for several months.
So, hopefully they’ll come to their senses and they’ll do a deal.
To Louis’ point, Iran has a big incentive to end this. The longer the conflict continues, the greater, and maybe permanent, damage it does to their own oil infrastructure – the very asset their economy depends on. That’s a huge motivation to find an offramp behind the saber-rattling.
Now, Louis isn’t dismissing the inflation risk entirely. He flagged that wholesale services costs rose 1.2%. And as I noted in yesterday’s Digest, once services inflation embeds, it can be sticky.
Where Louis diverges from the rate-hike crowd isn’t on that risk – it’s on what offsets it. He argues that AI-driven productivity gains are a structural deflationary force that current data haven’t yet captured.
So, the question isn’t whether service inflation is real. It’s whether the productivity story is big enough to counteract it over time.
Louis believes it is. The futures market, right now, does not.
The structural argument the rate-hike crowd is missing
Let’s bring the policymakers and their forecasts for what’s coming into the mix…
Back to Louis:
Kevin Hassett, who is the head of the Council of Economic Advisers, on Sunday made it clear we will be hitting 6% GDP growth this year.
That GDP growth is coming from AI-led productivity gains, which are not inflationary. It’s coming from record energy exports, which helps put downward pressure on the trade deficit that adds to GDP.
Our consumer’s pretty healthy. We realize there’s higher prices at the pump, but the consumer by and large is pretty healthy.
Now, don’t miss this: The Fed’s job is to manage inflation without killing growth – that’s the tightrope…
But if the growth we’re seeing is driven, in great part, by AI – real productivity, not just borrowed from the future via cheap money – then hiking rates to kill inflation risks destroying the very engine that’s doing the deflationary work.
The Fed knows this – that’s why the hike scenario may be more bark than bite. That’s part of Louis’ argument.
Therefore, while the timing of a rate cut is uncertain, the direction, he believes, is not. So, banking on a rate hike is a long shot.
Treasury Secretary Scott Bessent has been making the same productivity argument
At the Semafor World Economy Conference in April – with the Iran conflict already driving energy prices higher – Bessent was clear about what he was seeing:
If ever there was “Team Transitory,” it’s this.
I don’t believe this is going to get embedded into inflation expectations.
He added that the Fed “will need to cut rates,” while acknowledging that waiting for more clarity was reasonable.
In the wake of this week’s hot prints, it’s fair to believe that Bessent’s timeline may have shifted, though not his destination.
Meanwhile, the Treasury Secretary and the incoming Fed Chair, Kevin Warsh, are working from the same playbook.
Warsh – like Louis – believes AI is doing something the inflation data can’t yet see: making businesses dramatically more efficient, which puts downward pressure on prices over time. In a Wall Street Journal op-ed last fall, he wrote that AI is a “significant disinflationary force”.
Think of it as a slow-moving counterweight to the energy shock. It doesn’t show up in this month’s CPI. But it’s building.
We covered Warsh’s full framework in our April 29 Digest. In short, he intends to cut the fed funds rate while simultaneously shrinking the Fed’s $6.7 trillion balance sheet – a coordinated strategy designed to normalize policy without abandoning the direction of travel.
Overall, here’s Louis’ take on what to expect and when:
Obviously, Treasury Secretary Scott Bessent is going to have his hands full, and incoming Fed Chairman Kevin Warsh will have to work on his FOMC colleagues before we can even consider rate cuts. But we might get some later in the year.
Now, while the timeline of cuts is uncertain, Louis isn’t waiting for certainty to act…
What this means for your portfolio
Louis has seen this movie before. Four times, to be precise.
Every time the Fed has opened a sustained rate-cut cycle, the same playbook has unfolded. Smaller, domestically focused companies – the ones most sensitive to borrowing costs and most leveraged to U.S. economic growth – become the biggest winners.
It’s not immediate, but it’s consistent.
Here’s Louis highlighting some of the smaller-cap winners from prior cycles:
- 1995 Fed pivot: Cisco +2,062%. Ascend +2,800%. AOL +2,900%.
- 2001 rate cuts: Frontline +1,513%. Hansen Natural +1,125%.
- 2008 rate cuts: Lithia Motors +475%. IPG Photonics +665%.
- 2020 COVID cuts: MARA Holdings +1,800%. Moderna +1,200%.
Different stocks. Different sectors. Same dynamic every time.
Louis’s Stock Grader system has been running throughout this early phase of the cycle. It has flagged – strong fundamentals, building institutional buying pressure, and consistent top rankings in his eight-factor model.
He calls it the : companies too small for the big Wall Street funds to touch, but not too small for you.
He went live yesterday at his to walk through his highest-conviction picks from that list – and gave away a free stock recommendation just for attending. If you missed it, .
Coming full circle…
The market is now pricing in a hike. Louis is positioning for cuts.
One of them is reading the chessboard correctly.
History suggests it’s Louis.
Have a good evening,
Jeff Remsburg
