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A few clouds are on the horizon, with the debate on rates and inflation currently dominating everything else. US Equities down, rates slightly up, and bonds down again. Approaching the turbulent back half of September with greater care (and prudent risk management: 3% weekly stops). The Fed will pause in September, but the next few meetings are now live, and a first cut is not presently on the cards until June 2024. Continue in general to be positive on equities, and warming up on bonds. As usual, 3Q23 earnings (starting in October) will be key. 

Major market events 18th – 22nd September 2023

Highlights for the week

Mon: SG Trade Balance


Wed: JP Trade Balance, UK CPI, UK PPI, DE PPI, US Fed Interest Rate Decision 

Thu: SW Interest Rate Decision, CH Interest Rate Decision, UK BOE Interest Rate Decision, US Philly Fed Manufacturing Index, US Initial Jobless Claims

Fri: JP CPI, JP BOJ Interest Rate Decision, UK Retail Sales, UK Manufacturing PMI, US Manufacturing PMI, US Services PMI 

Performance Review

  • Index 8/9/2023 15/9/2023 WTD YTD
    Dow Jones 34,576.39 34,618.24  0.12% 4.47%
    S&P 500 4,457.49 4,450.32 -0.16% 16.37%
    Nasdaq 100 15,280.23 15,202.40 -0.51% 39.95%
    Euro Stoxx 50 4,237.19 4,295.09  1.37% 11.38%
    Nikkei 225 32,606.84 33,533.09  2.84% 30.39%
    Source: Google

    * The ides of September certainly lived up to their reputation. There’s no escape from the turmoil in bonds/rates, which in turn affects everything else. We heard from the ECB that their tightening cycle should be complete, yet rates went higher still. The data (CPI and PPI) from the US was not as benign as hoped, and Oracle’s earnings (or, more correctly, its guidance) were nothing short of a disaster.  Rates continue to shoot up across the world, and soaring yields dampened the appetite for equities and risk assets in general. Hence in the current lull in corporate earnings, and with macro factors dominating, it should come as no surprise that the week went south for most markets, with the notable exception of Europe and Japan. Once again, data will be key in driving the Federal Reserve going forward, but under the current environment talking about 6% is no longer taboo. The US Central Bank will pause in September, but November, December, and even January are live meetings. The market is definitely not sold on Fed cuts and fears we have yet to touch the summit.

    * Last week, value clearly trumped growth, especially after the Oracle bombshell. It is curious to note that Japanese Equity Markets did well while the yield on the 10-year JGBs rose by 10 bps. The BOJ risks getting very late to the party of hiking cycles, making so far some very prudent moves while others have completed, or are about to complete, their hiking cycles. Notably, Japanese officials tried to defend the JPY, whose fall is beginning to create worries at home, as well as stemming imported inflation. If you would like to test the waters (this is particularly true for the Nasdaq 100), I recommend having a weekly stop of 3% as timing the market is now even more difficult. The great Ray Dalio mentioned that he prefers cash at the moment over bonds, as further testimony that the wild moves in rates are yet to stabilize. And why not? With yields so enticing, why take on board more risk (especially if you think that inflation, sooner or later, is headed downward?).

    * Once again it was Japan’s turn to shine, with the Nikkei 225 being the best market for the third week in a row. Europe needs to consolidate and lick its wounds before trying to resume the climb to its previous high set in July 2007 (4524.45), so the leadership will in all likelihood continue to be provided by the S&P 500 and the Nasdaq 100 which are now chasing their all-time highs, despite last week’s setback. There is an almost perfect consensus – 98.0% – according to the CME FedWatch tool – for the Fed to be on hold in September – which would be the second time this year. November has turned into a live meeting, but the probability we will see higher rates then has declined from 47% last week to 27.6%. The outlook is clouded, however – and the CME FedWatch doesn’t see a Fed cut until June 2024, which could be tough for the market to swallow. We’ll hear from the BOE this week, and even though its officials have mentioned that rates have been nearing their peaks, I fear that we’ll see (a) further hike(s) before reaching the top.

    * We’ve heard for some time about a hard (more likely) or soft landing for the economy, with a recession that was supposed to begin as early as in 2Q23, and the US economy seems to have performed better than anyone expected. Indeed, the Atlanta Fed’s GDPNow model is currently forecasting 3Q23 growth of 4.9%, down from 5.6% last week. One notable aspect is that – from the same survey – the current forecast derived from the Blue Chip consensus is now nearing 3%. This has led analysts to increase EPS forecasts for the first time in the last 2 years (since 3Q21). Goldman Sachs, which has been spot on in its forecasts on the economy, is now forecasting a 20% chance of a recession in the US in the next 12 months, with lots of disinflation to take place in 2H23, and at the same time, it maintains higher than consensus estimates for US GDP, while being less optimistic than consensus on 2024 S&P 500 EPS. After having gone past the rates tantrum, the baton passes on to the economy, which so far has performed admirably, despite the tough environment. While no longer expecting a more benign rate environment in 2H23 (and we might need to wait until 2H24 for that), earnings have been mostly positive so far, with 0.5% expected growth in 3Q23 and a more solid pick-up in 4Q23.

    * We are reaching the end of the 2Q23 earnings reports, and while we need to reach October to have an update on 3Q23, this week we will be able to witness results for 3 summer months from companies that report a month early like FedEx, whose freight business is very important for its high correlation with the state of the economy.

Checking up on the economy: the good

The ‘good’ points to more sustained growth and no recession, albeit at the cost of higher rates (the ‘higher for longer’ moniker soon becoming a mantra), even though expectations for rate cuts are slowly being shifted to 2024, and quite possibly to the back half. There does seem to be a change in the narrative though, at least according to what is being priced by the market, with rates becoming less of a concern and the economy’s performance becoming more of an issue. Introducing the Atlanta Fed GDPNow estimate for 3Q23, which at 4.9% – reduced from 5.6% last week – would account for staggering growth. As before, there is a meaningful difference between this forecast and the consensus for Blue Chips; they will have to converge at some point. It is good and notable to see that these are in positive territory and have been improving (=no recession) in the last two months or so, with the Blue Chips consensus now moving to almost 3%, representing very good progress, given that we started at 1% or so.

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

In terms of positioning, there seems to be an appetite for risk assets, even though we went through the summer lull, and September can be looked at difficult/negative seasonality. Introducing Goldman Sachs’ Risk Appetite Indicator, which is still elevated at present.

Source: Haver Analytics, Datastream, Goldman Sachs Global Investment Research,

Another positive indicator is the return of IPOs. ARM has been placed successfully, and it is surprising to see so few placements while the market is doing so well (certainly the S&P 500 and the Nasdaq). This should account for a medium-term positive view.

Source: Topdown Charts, Quandl, Nasdaq, SEC, Refinitiv,

Checking up on the economy: the bad

Let’s start with this chart with a very useful reminder: Earnings do not survive recessions. So we absolutely must avoid one if we are to thrive. While the debate is very much alive and the jury’s still out, there are some indications that show the economy to be in trouble and likely to fall into a recession. One of these is the probability of recession as calculated from the yield curve, currently showing a probability of 70.65%. I would further note that when this level was so high, a recession promptly ensued. This time is different? At least it has been falling from its recent peak, but considering the state of the bond market it has to be expected. Something is rotten in the state of Denmark. The next update will take place on September, 28th.

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

Introducing some new, bearish forecasts from Morgan Stanley that see S&P 500’s earnings cut from $195 to $185 (bottom-up consensus: $221; top-down consensus: Goldman Sachs $224, J.P. Morgan $205, Bank of America $200). Should such a scenario (which would include a rather severe recession) come true, the market would undoubtedly be under much pressure, hammered by a powerful double whammy of a hit on its multiple and its earnings. With analysts upgrading earnings forecasts for the first time since 3Q21 and with positive GDP forecasts as a tailwind, we can now see some evidence that earnings can rebound in 3Q23 after finding their trough in their current (2Q23) quarter.

September (downdraws) and October (volatility) are difficult for the stock market. While the Fed should pause this week, questions abound on the dot plots and when inflation will start to fall. And here we get to a traditional ‘chicken and egg’ question: will inflation decline quickly enough for the Fed to cut rates, or will the economy crumble under the high rates and make Fed cuts ineffective? Inflation is currently the #1 tail risk, as rates and bonds can attest. Be careful out there.

Source: BofA Global Fund Manager Survey,

Checking up on the economy: the ugly

Valuation certainly isn’t cheap. It is even less so considering such appealing yields. This has led some to speculate that the current P/E is unsustainable. The current forward P/E of 18.8 is higher than the 5-year average of 18.7 and the 10-year average of 17.5. Hence earnings are of paramount importance. It is true that the market is expensive, but it much depends on the outlook for earnings in 3H23. If the economy can continue to perform, it would seem feasible to see the market trading around such multiples, perhaps with a slight compression due to the better results reported.

The chart below is one of many to offer a glimpse into the chronic underperformance of the S&P 500 members vs the index. This happens when performance is being driven by a small quantity of stocks (the magnificent 7). But such outperformance could also be seen, in a similar fashion, in other contests: growth vs value, IT vs other sectors of the S&P 500, US vs Europe … and so on. Concentration is always a problem because if too many of the magnificent 7 were to falter, it would absolutely cause the index to fall as a consequence.

Source: The Daily Shot

This is really ugly. The Treasury Curve – no matter how you want to look at it – has been inverted for a long time. This usually means a recession. I note that the curve has rarely been inverted for so long without having a real impact on the economy …

Source: The Daily Shot

Sentiment and what the market is telling us

The market goes sideways and it’s only fair to find the Fear and Greed Index pretty much where it was last week, still in Neutral territory, ending with a reading of 52, up from 51 last week.

Source: CNN Business

The lagging AAII Sentiment Survey, on the back of the two lackluster weeks we just experienced,  has tempered the frenzy of the Bulls. Hence, we are back in limbo, with Neutral positioning in the relative majority.

Source: AAII Sentiment Survey

What are the Flows telling us?

Equities are back in vogue, driven by the largest inflow since March 2022. This is somewhat surprising (and no doubt driven by technology), given the attractive yields offered by bonds. Stay tuned …

Source: BofA Global Investment Strategy, Bloomberg,

To be true, Bonds + Cash is having a monster year  – Cash is definitely king at the moment. Noting Equities’ solid performance, perhaps meaning that the consumer still has money in his pocket to invest. 

Source: Goldman Sachs Global Investment Research,

Earnings Review

Source: FactSet

The forward 12-month P/E ratio for the S&P 500 is 18.8x, which is above the 5-year average at 18.7x, and above the 10-year average at 17.5x. The present, 2023 bottom-up level for S&P 500 earnings ($222.18) is hovering just below Goldman Sachs’ top-down $224 forecast, while if we look at 2024 the current bottom-up value ($248.16) is well above their forecast of $237. It will be key to continue to monitor whether these increases in estimates continue as reporting for 3Q23 comes in. 

The upward revision to 3Q23 earnings growth (0.2%), has been positive if compared to 30 Jun’s 0.0%; we won’t have much to wait for the actual results, which could be better than what is currently forecasted. Despite the concern about a possible recession next year, analysts still forecast a positive growth in earnings for the overall market in CY 2023 of 1.2% year on year, vs 0.5% on Jun 30, while revenue is forecasted to grow by 2.4% vs 2.4% on Jun 30.

Source: FactSet

With estimates now measured against the forecasts as of Jun 30th, there are very few differences yet. Of note, Information Technology’s growth is now positive by 3%, greatly outstripping both earlier negative forecasts (of as much as -1%) and their Jun 30th previous reference (0.8%).

Source: FactSet

The S&P 500 has its revenue growth estimates at 2.4%, level with last week’s. Consumer discretionaries are now leading the pack in terms of revenue forecasts. Information Technology revenue growth has been revised upwards to 1.9% from as low as 0.7% and is now better than the 1.5% recorded on Jun 30th. The sector seems to be doing better on the top than on the bottom line, perhaps signaling the reason for some of the layoffs.

Source: FactSet

Let’s take a look at EPS for 2023 and 2024, which last week had a minor downward revision. The forecast for 2023 has now been updated to $222.18; while 2024’s EPS are currently forecasted to be $248.61, both very stable if compared to last week’s.

Source: FactSet

This is the detail for 3Q23. While the market might be more concerned about rates and recession than earnings at this point, the narrative is changing from rate risk to macro risk where earnings will be of paramount importance. Once again the market repeated its 1Q23 feat, by having a lower-than-forecasted loss for 2Q23 and forcing analysts to upgrade their estimates. Let’s hope this can continue.

Earnings, What’s Next?

The earnings season is now ending its 2Q23 reports in earnest. Here’s a list of companies reporting this week. Highlights include FedEx (Wednesday, After Close).

Source: Earnings Whispers

Market Considerations

Source: BofA Global Investment Strategy,

Source: Bloomberg, Datastream, STOXX, Goldman Sachs  Global Investment Research,

Revenue growth estimates for 2024 are forecasted to grow by 5.6% (5.0% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 12.1% (11.8% 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). September and October are traditionally two difficult months, so my optimism is somehow tempered here, even though the strong performance so far should prevent a catastrophe. The two charts above display the asset classes you should consider given your macro positioning, and Goldman Sachs’ macro targets on a 3-, 6-, and 12-month basis. While their near-term optimism is somewhat tempered, their 12-month targets offer a decent upside still on Equity Markets, a mild reduction in yields, and a potential decline of the $ against £ and Eur, as the Fed will be the first Central Bank to cut rates when time is ripe. 

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 okay, even though passing the peak in rates will remove the overhang present on the market. If and when rates 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, even though taking a break and bringing home the profits might well make sense given the difficult seasonality, 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). 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 the second half of 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 (4%+) yields. 10-year yields were up once again last week 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!



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.




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