Higher and higher. Equities march to new highs for the year, rates down, and bonds finally up. With multiples stretched earnings reports will be key. Continue to be positive on equities, even if the market does feel extended (in particular Nasdaq 100, and Nikkei 225), and starting to warm up on bonds, given a few green shoots of receding inflation.

Major market events 17th – 21st July 2023

Highlights for the week

Mon: CN GDP, CN Industrial Production.

Tue: US Retail Sales, US Industrial Production, US Capacity Utilization.

Wed: UK CPI, UK PPI, EU CPI.

Thu: JP Trade Balance, DE PPI, US Philly Fed Manufacturing Index, US Initial Jobless Claims.

Fri: UK Retail Sales.

Performance Review

Index	7/7/2023	14/7/2023	WTD	YTD
Dow Jones	33,734.88	34,509.03	2.29%	4.14%
S&P 500	4398.95	4,505.42	2.42%	17.82%
Nasdaq 100	15,036.85	15,565.60	3.52%	43.29%
Euro Stoxx 50	4,236.60	4,400.11	3.86%	14.11%
Nikkei 225	32,388.42	32,391.26	0.01%	25.95%

• Higher and higher. Fuelled by benevolent economic data (US CPI and PPI) and by the resulting decline in yields (finally a positive week for bonds) stocks managed to gain further upside. It is looking like some of the most irrational fears about excessive rate hikes have been calmed, and perspectives for a US recession have been pushed further out. This morning, US Secretary of the Treasury Janet Yellen mentioned that although China’s economic troubles (more like a mixed bag according to the data) will have an impact on the global economy, she still expects the US to escape a recession.
• While growth did make solid progress, it was value’s turn (Europe) to shine last week. As I’m writing, the US is holding up well and Europe is declining, somehow evening out the recovery in relative performance that we witnessed last week. Apart from that, the Nasdaq 100 shone as usual, but watch out for the July 24 ‘special rebalance’ which will trim some of the index’s largest constituents and best performers. A quiet week for Japan, but watch out because Max is hinting at a possible change in their Yield Curve Controls due to soaring inflation, putting Japan on a par with all major G7 economies which saw rate increases. This might also prompt further JPY gains – I note that, at least for the time being, it has stopped sliding against all major currencies. If you would like to test the waters (this is particularly true for the Nasdaq 100 and Nikkei 225), I recommend having a weekly stop of 3% as timing the market is now even more difficult. Barring no disasters on US Earnings, it is possibly ok to re-enter the European markets as well, again with the same weekly stop loss.
• Europe managed to brush aside the dreadful week that followed the ADP Payrolls and is trying to resume the climb to its previous high set in July 2007 (4524.45). We will soon witness the 2Q23 reports in the US, and while on one hand expectations are low and earnings have consistently beaten them lately, there is evidence that investors are bullish. There is an almost perfect consensus – 96.1% – according to the CME FedWatch tool – for another 25bps hike in July, while after the positive Inflation data expectations have come down meaningfully for another hike in September or November; Goldman Sachs expects the July hike to be the last one for the year. While the peak terminal rate might be in sight, the discussion is wide open regarding the timing of any possible rate cut in 2024. Deflation is likely to continue in 2H24, but the Fed will want to make sure its 2% target can be achieved before starting to ease. This of course has an impact on European markets, particularly those of the EU and the UK, for which the terminal rate hasn’t been yet identified.
• Recession, what recession? The die-hards are not budging and are just moving out their targets to 1H24. The Fed might be done soon, though changes in Interest Rate policy do take some time to filter through the economy. The Fed is worried about inflation not slowing quickly enough, but Goldman Sachs, which has been spot on in its forecasts on the economy, is expecting a lot of disinflation to take place in 2H23, and at the same time maintains higher than consensus estimates for US GDP. They have reduced their forecast for a recession in the US in 2023 even further to 20% (consensus is at 65%). After having gone past the rates tantrum, the baton passes on to the economy, which so far has performed admirably, despite the tough environment. In 2H23 it is expected that the economy will meet a more benign rate environment, although we need to see if earnings will indeed trough in 2Q23 and whether they will bounce in the back half of the year. It is important to see if bottom-up forecasts for both 2023 and 2024 continue to be cut or, at some point, manage to find their feet.
• We will be starting in earnest with the 2Q23 reports this week. Tesla and Netflix will start the reporting for the magnificent 7 stocks. Fasten your seat belts!

Earnings, What’s Next?

The earnings season is now starting its 2Q23 reports in earnest. Here’s a list of companies reporting this week. Highlights include Tesla (Wednesday, After Close), Netflix (Wednesday, After Close), TSMC (Thursday, Before Open), and American Express (Friday, Before Open).

Source: Earnings Whispers

Market Considerations

Revenue growth estimates for 2024 are forecasted to grow by 4.9% (4.9% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 12.4% (12.3% on Jun 30th), so the future looks to be bright. While we continue to debate whether the US economy will fall into a recession or not and what will be the peak rates for Fed Funds, we welcome the arrival of a new bull market for the S&P 500 (+20% from the October lows), near-term it is quite possible that we see a consolidation around current prices after such a big jump. That’s the message in the chart above: after a stellar performance in the first half, some consolidation is needed before the market can march to new highs.

We are probably shifting from a monetary risk to a macro risk, where the economy’s performance is more important than what the Fed does. We should be mindful that the economy is probably just doing ok, even though passing the peak in rates will remove the overhang present on the market. If and when rates will diminish in importance, earnings (and top-line growth) will hopefully pick up their pace.

So the breakout happened, with both the S&P 500 and the Nasdaq 100 ahead of their previous Feb 2 highs. Next week will probably be sideways/down again, as the market consolidates and forms a base around current levels. Still, I tactically continue to suggest staying long on Equities, with a 3% weekly stop, despite a possible consolidation/correction, as long as the S&P 500 and the Nasdaq 100 stay above their Feb 2 peaks (4,179.76 and 12,803.14 respectively). If those levels hold, it would open a new leg up for equities and for the market; if they don’t, we fall in double-top territory with the markets possibly revisiting their recent lows. Regarding bonds, the trajectory is that yields will eventually fall, albeit with a few bumps on the road, although given the new Fed’s forecast, we might have to wait until 2024 for that.

For the less volatility prone of you, it may make sense to take all opportunities to alter the weights of your asset allocation by increasing the weights of safety assets at the expense of more risky assets by lightening up in equities and reinvesting in bonds at attractive (approx 4%) yields. For those willing to look besides US treasuries, investment grade bonds (LQD ETF) could also be a good compromise: 1.2% pickup over government bonds for the safest part of the credit complex may still be compelling. 10-Year yields were turbulent last week, both in the US and Europe, though the ceiling should be near for both. For those wishing to keep their money in Equities with lower volatility, suggest switching to Japan as the company with the most stable outlook (the country with the more precise picture of rates at the moment) until rate perspectives become clearer in the US and Europe. They got a boost given the recent buy recommendation by Warren Buffett, and the oracle is very rarely wrong. So Japanese Equities are now investable regardless of the lower volatility derived by being the only nation in G7 not to raise rates in the current environment. Just watch out for the JPY – if the current strength in the economy and markets is to continue, you may want to hedge it as it will likely continue to slide (against all major currencies).

Happy trading and see you next week!

InflectionPoint

Disclaimer

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