Tough week for equities, with the market selling all the recent winners. Netflix disappoints, we’ll see this week if this was company-specific or if there is a malaise in tech earnings. Now neutral on equities and bonds, and long USD. Watch out for US GDP on Thursday and for US PCE Core Price Index on Friday. The biggest tail risk is inflation staying high(er for longer), forcing Central Banks to postpone easing until later in the year, followed by adverse geopolitical outcomes, and elections. 

Major market events 22nd – 26th April 2024 

Highlights for the week

Mon: EU ECB President Lagarde Speaks

Tue: FR Manufacturing PMI, DE Manufacturing PMI, EU Manufacturing PMI, UK Manufacturing PMI, US Manufacturing PMI, US Services PMI

Wed: DE Ifo Business Climate Index, US Durable Goods Orders, US Atlanta Fed GDPNow 

Thu: US GDP, US GDP Price Index, US Jobless Claims, US Fed’s Balance Sheet

Fri: JP CPI, JP BOJ Interest Rate Decision, US Core PCE Price Index, US Atlanta Fed GDPNow 

Performance Review

Index	12/4/2024	19/4/2024	WTD	YTD
Dow Jones	37,983.24	37,986.40	0.01%	0.72%
S&P 500	5,123.41	4,967.23	-3.05%	4.73%
Nasdaq 100	18,003.49	17,037.65	-5.36%	2.99%
Euro Stoxx 50	4,955.01	4,955.01	-1.19%	9.80%
Nikkei 225	39,535.66	37,109.23	-6.14%	11.48%

Source: Google

InflectionPoint reports:

* Carnage – an eventful week brought a double whammy against the market – higher inflation and weak earnings (Netflix) – exactly the opposite of what was needed. It was a week of restating expectations and selling the winners, and the dismal performance from Netflix certainly weighed on the Nasdaq – now the onus is on its siblings to prove that it was just a company-specific event. I feel that the correction has further to go at this point as valuation won’t provide any support – we need better earnings, lower yields, or possibly both if the bull market is to resume. We will have two pieces of important data this week – the US GDP on Thursday and the Core PCE Price Index (the Fed’s favourite measure of inflation) on Friday, but I don’t think the current trend will change, so I expect the GDP to be in line or better, and the Core PCE Price Index to be in line or worse. I believe that the timing for the first cut has now shifted from July to September, and the market does not want that as it creates more uncertainty. The ECB is facing a different picture and a different valuation for the European Markets, so it may still cut rates in June. 1Q24 earnings have been met with continuing cuts and even though it is still early days they have to improve to show another quarter of year-to-year growth. To be clear, I don’t think we have seen the top for the year for the American Indices, but for the next 6 months probably yes, until we have a clearer picture of inflation, earnings, and rate cuts. To most market pundits the (equities) markets feel extended, and rightly so – as on Friday the S&P 500’s multiple reached a level of 19.9x after the correction, which is tough to maintain with the current level of interest rates. Confirming my changed recommendations: neutral on equities and bonds, long USD, and still like Japan (Warren Buffett’s endorsement was the best thing that could happen to the country), but watch out (hedge!) for the JPY, which is now well beyond the critical resistance of 152 vs the USD. Let’s see if the BOJ will say anything to support the currency. 

* Tough week for almost everything, but the Dow Jones found its meaning – it is a shelter from the storm. Value did offer some protection from the tanking markets, and all winners so far got killed – namely the S&P 500, the Nasdaq, and Japan. If the correction continues, Japan will likely continue to suffer (and the JPY continue to slide).  The picture for rates is getting more complicated by a vibrant job market in the US and by strong, sticky inflation – and Chairman Powell has said that if inflation does not retreat (hard to do when the economy is firing on all cylinders) he will keep rates on hold for longer. The ECB might surprise in being the second major central bank (after the SNB) to ease rates in June – this will benefit the USD. With the Fed and the ECB still undecided about cutting rates, most of the attention is focused on when they might start: this does matter for most of the markets, whose valuations are extended. My belief is that the markets (and the Fed) will have to look at meaningful data signalling a slowdown in inflation before the cuts will take place. The reporting season will continue in earnest this week, estimates are currently low and getting lower due to some EPS cuts. Personally, I have been focusing more on the historic valuations of the S&P 500 rather than on relative ones (which are also not cheap, to put it mildly). And something did give – with rates no longer falling, and earnings no longer hitting forecasts, the market’s current valuation is unsustainable.

*  Sell in May and go away, come back on St. Leger’s Day? Well, the correction has come early this year, but September might be a good time to get back in to cheer the first rates cut. May – once a serious contender for the Fed to begin easing – is now toast (>2%). I now believe that the first Fed cut will happen in September (64.3%) instead of July (41.5%), or June (15.2%). US CPI did surprise so much as inflation is seen as no longer falling; I wonder if this will have an impact on the US Core PCE Price Index? (I think so). With the current strong US labour market conditions, it would be tough to expect inflation to moderate further, which will reinforce the FOMC’s idea to hold rates for longer, possibly until September. Inflation in the EU came in at 2.6% in March; this is down to 2.4% in the Euro area. We need (lower) yields and (higher) earnings to support some of the highest multiples since my heyday (the fated 1999-2000), but at least the US can continue to enjoy a solid economy.  

* Yields on US 10-year Treasuries have reached 4.65%, and were mostly stable last week; yields in Europe continued to increase further, and the EUR was mostly flat against the USD and is now hovering around 1.06. While in 1999 yields were even higher, and the Fed was hiking not easing (well they haven’t started yet), we definitely need yields to return below 4% to have a more constructive scenario. Earnings for 1Q24 are currently estimated at just 0.5%, vs 3.4% on March 31st. The current forward P/E ratio for the S&P 500 is 19.9x – and while it is higher both than the 5-year (19.1x) average and the 10-year average (17.8x), it is not cheap enough to withstand such high interest rates. (Yes, back in 1999, multiples AND rates were both higher – but that is a past unlikely to return). Introducing a 2024 S&P 500 bottom-up earnings estimate of 242.97 with a negative revision from 243.75 last week, which is not too far from the top-down consensus of 245 (Goldman Sachs 241, Morgan Stanley 229, J.P. Morgan 225, Bank of America 235). For reference, the current 2025 S&P 500 bottom-up earnings estimate is 276.70, with no cuts last week.

Source: FactSet

* Growth is still plentiful according to Atlanta and New York Federal Reserve Banks, with the latter starting its forecast for 2Q24. Looking at 1Q24, the former’s GDPNow model is forecasting growth of 2.9%, revised up from last week’s 2.8%, with the Blue Chips consensus now above 2.0%. The latter’s Nowcast, which produces an annual forecast that is less volatile, saw a significant climb and now sees annual growth in 1Q24 at 2.23%, in line with 2.23% last week, and up from 2.05% in December. There is still no recession forecast in their model, up to one sigma, but I wonder if this further reduction is an early signal that the US Federal Reserve should start reducing rates? Introducing a 2Q24 forecast with a growth of 2.71%, revised upwards from last week’s 2.58% last week. Earnings are expected to come in at 0.5% in 1Q24, compared with a forecast of 3.4% as of March 31st.  Revenue growth is faring better, at 3.5% in 1Q24, vs 3.5% as of Mar 31st. For 2024, earnings growth is forecasted at 10.7%, vs 10.8% as of Mar 31st, with revenues coming in at 5.0%, vs 5.1% as of Dec 31st. Finally, it’s worth noticing that the chance of a recession, as calculated from the yield curve, according to the Federal Reserve Bank of Cleveland, has now risen (February 2025) to 64%, given the rebound in yields, from a bottom of 53.36% in September.

Source: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Federal Reserve Bank of Atlanta

Source: Federal Reserve Bank of New York, New York Fed Staff Nowcast

Source: Federal Reserve Board, Federal Reserve Bank of Cleveland, Haver Analytics

* Earnings are finally here. However, geopolitics and rates are likely to obscure everything for a while. Hang tight!

Earnings, What’s Next?

The reporting season is now starting in earnest for 1Q24. Here is a snapshot of companies reporting next week, which is a make-or-break week to see if the market can hold current levels or will go even lower! Highlights include Tesla (Tuesday, After Close), Visa (Tuesday, After Close), Meta (Wednesday, After Close), Microsoft (Thursday, After Close), and Alphabet (Thursday, After Close).  

Source: Earnings Whispers

Market Considerations

Source: BEA, BLS, Haver Analytics, Deutsche Bank, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.1% on Mar 31st) and earnings growth estimates for 2024 are predicted to grow by 10.7% (10.8% on Mar 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.9% (5.9% on Mar 31st) and earnings to grow by 13.8% (13.4% on Mar 31st). As previously mentioned, the Fed probably has stopped hiking and we have reached the peak in rates, so the next move will be down, either in June, July, or September. Apart from the cut from quite high levels, which will probably help make these lofty multiples seem more bearable than offering a real stimulus to the economy, what will be important is to see the extent to which the Central Banks are willing to cut rates and their timeframe. This is obviously connected to the chances of the US Economy going into recession, which we’ll likely hear less and less (while paying a lot of attention to the data) until the November elections, as the current US Government has been a big spender of late. Meanwhile, the upcoming US Presidential election will be a rematch of 2020 between Trump and Biden. 

The highlight of this week is on valuation. This chart from Goldman Sachs shows that the current market is overvalued relative to the macro (although not as much as in 1999). According to Deutsche BaSo either the macro improves, or the valuation will be reduced over the coming months. Simple.

Due to the persistent stickiness of inflation, monetary policy is taking centre stage once again. Obviously, we should not overlook geopolitical scenarios (any escalation would be negative for the markets) and the upcoming elections, in which the UK may see the first Labour government since the Tony Blair-Gordon Brown years, albeit immersed in a global shift to the right (more protectionism, less globalization). 

Last week there was a slide from the S&P, the Nasdaq 100, and the Nikkei 225, all of which declined from recent highs. Europe made a remarkable comeback after a slow start, and Japan (minus the JPY) stole the show this year by topping its 34-year previous record. I now recommend a neutral position in equities, and a neutral position on bonds as these reach higher yields (which should peak at 5%). Watch out for any resurgence of inflation, as this can significantly alter the scenario if persistent.

There are three main headline risks to what is otherwise a constructive view for 2024: i) any resurgence/stickiness in inflation; ii) any negative geopolitical outcome (which could see an expansion of the current conflicts); and iii) elections, particularly in the US, where a new Trump presidency looks quite likely. 

Regarding bonds, the expected disinflation in 2H23 and 1H24 indeed came more slowly than expected – did the unexpected rise in the US CPI stop the process, or was it just a spanner in the works? Once again, until we have more clarity on any peaceful resolution of the conflict between Israel and Hamas or further progress in rates with yields on the US long bond going < 4.00% once again, I advise holding your bonds, keeping the overall duration below 10 years. Obviously, investing any liquidity in the money market (up to 1/2 years) still makes sense.

Don’t neglect Japan – it is the more investable part of equities right now, thanks to good economic performance and a still dovish Central Bank. The Nikkei 225’s performance is based on solid fundamentals as Nominal GDP has stormed past resistance to new highs. The JPY tried a rebound earlier in the year but faltered once again, and I personally have the feeling it may weaken further. It is still the safest part of equities. Goldman Sachs’ Chief Global Strategist Peter Oppenheimer recommended overweight Japan in a recent video interview on Bloomberg TV.

Portfolios

Finally, I wanted to introduce two portfolios that Tom and I have published on Wikifolio. Tom’s a multi-asset portfolio, whereas the one I manage (with substantial input from Tom) is a global income and growth with a heavy US tilt. Check them out!

Last week we sold Brunello Cucinelli and kept the proceeds in cash. We have decided to leave out Nvidia, Meta, and Tesla, to better balance the portfolio, while not necessarily being negative on the prospects for these companies.

Introducing the third portfolio on Italian Equities. Again, Unicredit has been left out intentionally to quash any possible suspicion, but I wish the company and its management team the best for the future. 

https://www.wikifolio.com/en/int/w/wf00inf8ig

https://www.wikifolio.com/en/int/w/wf000ipggi

https://www.wikifolio.com/en/int/w/wf00ipiteq

Consulting

Finally, I wanted to mention that I have officially become an Italian Independent Financial Consultant (Consulente Finanziario Autonomo), registered with the Italian OCF since 19 March 2024. If you are interested in my financial advice, or simply for more information, please contact me at giorgio.vintani@inflectionpoint.blog

Please kindly note that you must be based in Italy to avail yourself of this service

Happy trading and see you next week!

InflectionPoint

Disclaimer

All views expressed on this site are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. I assume no responsibility for any errors or omissions in the content of this site and there is no guarantee for completeness or accuracy. The content is food for thought and it is not meant to be a solicitation to trade or invest. Readers should perform their investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics.