April NFP lower than expected sends yields down and equities up; earnings are solid. Another NFP is to come before the Fed’s June meeting. Now neutral on equities and bonds, and long USD. Watch out for US PPI (and Powell) on Tuesday, US CPI and EU GDP on Wednesday, and EU CPI 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 13th – 17rd May 2024 

Highlights for the week

Mon: EU Economic Forecasts, IN CPI

Tue: JP PPI, UK Average Earnings Index, DE CPI, CH PPI, SP CPI, US PPI, US Fed Chair Powell Speaks

Wed: FR CPI, EU GDP, US CPI, US Core Retail Sales, US Atlanta Fed GDPNow

Thu: JP GDP, US Jobless Claims, US Philly Fed Manufacturing Index, US Fed’s Balance Sheet

Fri: CN Industrial Production, JP Industrial Production, EU CPI

Performance Review

Index	3/5/2024	10/5/2024	WTD	YTD
Dow Jones	38,675.48	39,512.84	2.17%	4.77%
S&P 500	5,127.79	5,222.78	1.85%	10.12%
Nasdaq 100	17,890.79	18,161.18	1.51%	9.78%
Euro Stoxx 50	4,921.48	5,085.08	3.32%	12.68%
Nikkei 225	38,236.07*	38,229.11	-0.02%	14.84%

 

* 2/5/2024

Source: Google

InflectionPoint reports:

* After a week in which I was in the middle of a desert, I am back with my weekly thoughts. On Friday 3rd May the Nonfarm Payroll for the first time signalled a weakening of the US labour market – and unemployment shot up to 3.9% (4% is usually the level at which the Fed hikes, not begins to cut as in this occasion). That of course brought much relief in the market, sending equities up and – more importantly – treasury yields down. WSJ’s Chief Economic Correspondent Nick Timiraos says that the April NFP hardly is a game changer for the US Central Bank, as the May NFP will come before their next meeting – but of course the market thought differently. The reporting from US corporations continued during the past two weeks and surprised on the upside, defying the forecasts and the naysayers. While the Fed’s first cut is on the cards for September, the ECB might well proceed in June, following the SNB’s footsteps and accompanied by a cheer of the local equity market. Watch out for the US PPI on Tuesday followed by Chairman Powell’s speech, with US CPI on Wednesday, and EU CPI on Friday. The European Equity Markets have been strong lately, and could even outperform the US this year if the US Central Bank starts cuts on December 24, or even later. 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 20.4x, 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 had a huge weekly loss against most currencies, and is now beyond 158, aiming for 160. The BOJ intervened twice in the first week to address the yen’s weakness, and while there was a reinforcement of the Asian currency, it didn’t last with the market now testing the officer’s appetite for further intervention. Hedge for now and watch this space! 

* Driven by the unexpectedly positive April NFP and by positive earnings, the markets are revisiting their near-term highs. Earnings proved themselves by eventually beating their December 31st forecasts; positive momentum (the Dow was on a positive streak for 8 days) also helped. Europe shone again, benefitting from the potential tailwind of the ECB’s rate cuts coming in June, and positioned itself to be the best-performing market of 2024 after Japan lost its lustre. Value prospered and left growth in its tails – notable performances from Europe and the Dow Jones testified to that end. The complicated picture for rates has finally got one positive data point (said April NFP), but Chairman Powell will need more data points and confidence before cutting rates (in September?). 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. The reporting season will continue in earnest this week, estimates are now back on track and I am looking for further upgrades – recall that on Dec 31st the earnings forecasts for the S&P 500 were of as much as 5.1%. 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). Watch this space.

*  The rates’ angst seems to have no end this year while getting all Wall Street Economists on their feet as they retune their expectations. Back on St. Leger’s Day? Well, a rate cut might not happen even then! A small respite from this mayhem happened in the last two weeks, as a gift from the April NFP. This week was looked at as the first chance for the Fed to cut, but definitely no joy. June – once a serious contender for the Fed to begin easing and my previous forecast – is now toast (8.9%). I now believe that the first Fed cut will happen in September (63.4%), but the call is getting to 50/50, with little or no chances for July (29.6%). Let’s see if the strong US labour market conditions moderate further; there has been some green shoots (April NFP and last week’s Jobless Claims), but a swallow does not make summer. If not, the FOMC might stick to its idea to hold rates for longer, possibly until December (89% – 50bp rate cut in 2024). Inflation in the EU is more benign; watch out for EU GDP on Wednesday and EU CPI on Friday, as well as US CPI on Wednesday – the day after Chairman Powell’s speech. 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 4.47%, and were mostly stable last week after the April NFP; yields in Europe continued to increase further, particularly in Germany and France, and the EUR gained some ground against the USD, propping it near 1.08. 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 5.4% (from 3.5% two weeks ago), vs 3.4% on March 31st and 5.1% on December 31st. The current forward P/E ratio for the S&P 500 is 20.4x – 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 242.12, stable from 242.92 two weeks ago 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 277.86, also stable from last week.

Source: FactSet

* After the dismal 1.6% reading of US GDP for 1Q24, we are looking to very solid forecasts for 2Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 4.2%, with the Blue Chips consensus presently below 2.0%. As usual, one of the two will have to catch up with the other. The latter’s Nowcast, which produces a forecast that is less volatile, saw a significant climb and now sees growth in 2Q24 at 2.23%, in line with 2.23% last week, and down from 2.52% in March. There is still no recession forecast in their model, up to one sigma. Earnings are expected to come in at 5.4% in 1Q24, compared with a forecast of 3.4% as of March 31st. Revenue growth is faring better, at 4.1% in 1Q24, vs 3.5% as of Mar 31st. For 2024, earnings growth is forecasted at 11.1%, 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 (April 2025) to 55.08%.

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. Highlights include Cisco (Wednesday, After Close).  

Source: Earnings Whispers

Market Considerations

Source: Goldman Sachs Global Investment Research, 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 11.1% (10.8% on Mar 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.8% (6.0% on Mar 31st) and earnings to grow by 14.0% (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 September or December. 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 inflation. Its stickiness has thrown a spanner in the works of global central banks this year, and in particular for the Federal Reserve. If true, expect bond yields to moderate further; this would be positive for equities as well.

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 climb for the S&P, the Nasdaq 100, and the Dow Jones, all of which increased to 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!

No changes last week. 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 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.