Equities made further progress; 10-year Treasuries were stable, and other long bonds lost a little last week. Next week will be key, with all MAGMA companies reporting, plus the Nonfarm Payrolls on Friday.  Keep a long position in equities (with a 3% weekly stop), and start purchasing some bonds (max 20% of invested capital). 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 29th January – 2nd February 2024 

Highlights for the week

Mon: 

Tue: FR GDP, DE GDP, EU GDP, US CB Consumer Confidence, US JOLTs Job Openings, JP Industrial Production 

Wed: AU CPI, CN Manufacturing PMI, CN Composite PMI, DE Retail Sales, FR CPI, DE CPI, US ADP Nonfarm Employment, CA GDP, US FED Interest Rate Decision

Thu: DE Manufacturing PMI, EU Manufacturing PMI, UK Manufacturing PMI, EU CPI, UK BOE Interest Rate Decision, US Initial Jobless Claims, US ISM Manufacturing PMI, US FED’s Balance Sheet 

Fri: US Nonfarm Payrolls

Performance Review

Index	19/1/2024	26/1/2024	WTD	YTD
Dow Jones	37,863.80	38,109.43	0.65%	1.05%
S&P 500	4,839.41	4,890.97	1.07%	3.12%
Nasdaq 100	17,314.00	17,421.01	0.62%	5.31%
Euro Stoxx 50	4,448.83	4,635.47	4.20%	2.72%
Nikkei 225	35,963.27	35,751.07	-0.59%	7.40%

Source: Google

InflectionPoint reports:

* In the last week there was a continuation of what we have witnessed so far in 2024, with equities slightly up and bonds slightly down. There was a big reporting week with 15% of the companies included in the S&P 500 participating; this week will also see a continuation of that plus the (in)famous Nonfarm Payroll on Friday. To most market pundits the (equities) markets feel extended, and rightly so – as on Friday the S&P 500’s multiple reached a multiple of 20x. At the same time, there was slight progress in the US, and a slight retracement in Japan, with the notable comeback of Europe in focus, perhaps lifted by Francois Villeroy De Galhau’s comment that the ECB can cut rates at any time. At the same time, US Secretary to the Treasury Janet Yellen has stated that she does not see any recession for the US economy in her forecasts. Still long equities (but it may make sense to take a few profits here), still think the Fed is going to ease before the ECB (although the USD has been strong lately), 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. 

* While growth did do ok last week, with the S&P 500 and the Nasdaq 100 establishing new all-time highs, it was value’s turn to shine, driven by Europe’s outperformance. Esteemed Goldman Sachs Strategist David Kostin has been calling for a rotation to the names/sectors left behind so far, and this is more likely to happen if the US Economy is strong. Earnings were mixed last week, with Netflix reporting well, but with Tesla slumping pretty much as usual; the pain was also felt in the semiconductor space, with Intel having a disastrous report. On the plus side, IBM (usually not a company that reports better than expectations) did mention positive developments driven by AI. Next week will be the biggest reporting week in the US, with all MAGMA (Microsoft, Apple, Google (Alphabet), Meta, and Amazon) reporting, and the economic report so stay tuned. It will be a key week able to swing the pendulum in either way. Earnings are good and improving, but they are still projected to have negative growth in 4Q23, which would be the fourth of the last five quarters (the exception was 3Q23). This gets me to one of the main points: equities ARE expensive. 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). The other problem is that inflation is taking a long time to go down. Central Banks will eventually ease, but I fear not by as much and not as soon as the market expects. Meanwhile, it is fine to be long equities (always with the weekly 3% stop, and be careful next week!), and you could start putting some money in bonds as well, as yields on the 10-year Treasuries rise towards 4.50% (I really cannot see them going back to 5% – that would be WAY too much). 

*  From a rate perspective, the upcoming Fed Meeting will be a non-event. The CME FedWatch Tool is signalling that there are very slight chances (3%) of a cut in January, which means that almost certainly the FED will stay the course. The chances of a cut in March are approximately 48/52, which in my view accurately reflects the current situation; we’ll see the data, but if I had to flip a coin, I’d bet on May over March. 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; if and when disinflation does happen, you might want to look at small caps. For now, still stick with the best (large caps, and yes, the infamous Magnificent 7). 

* November and December were very positive months in terms of lower yields; January, much less so, and that continued last week. While yields on the US  long bond were unchanged, there was a slight increase in all other major markets.  I look forward to yields on 10-year Treasuries to return below 4% to have a more constructive scenario. Earnings for 4Q23 are currently estimated at -1.4, from -1.7% last week. Let’s see if they can repeat the feat of the past quarter, 25% of S&P 500 companies have reported now, but next week will be key, and then there are still some important companies to report like NVDA, which is such a massive contributor. The current forward P/E ratio for the S&P 500 is 20x – and while it is higher both than the 5-year (18.9x) average and the 10-year average (17.6x), 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). Bottom-up earnings for 4Q23 are now estimated at 226.7, even above Goldman Sachs’ own top-line forecast of 224.  Introducing a 2024 S&P 500 bottom-up earnings estimate of 242.90, which is not too fare from the top-down consensus of 245 (Goldman Sachs 237, Morgan Stanley 229, J.P. Morgan 225, Bank of America 235). 

* Growth is still plentiful according to Atlanta and New York Federal Reserve Banks. Looking at 1Q24, the former’s GDPNow model is forecasting growth of 3%, with the Blue Chips consensus around 1%. The latter’s Nowcast, which produces an annual forecast that is less volatile, sees annual growth at 2.80%, up 0.38% from last week, and from 2.05% in December. Even more interestingly, there is no recession forecast in their model, up to one sigma. Earnings are expected to come in at -1.4% in 4Q23, compared with an estimate of 1.5% as of Dec 31st.  Revenue growth is faring better, at 3.2% in 4Q23, vs 3.1% as of Dec 31st. For 2023, earnings growth is forecasted at 0.2%, vs 0.9% as of Dec 31st, with revenues coming in at 2.3%, vs 2.3% 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 to 66.47%, 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 – likely to overall meet/exceed estimates but watch out for the guidance. The January bottom-up estimate of $226.7 matches with the following forecasts: $224 from Goldman Sachs, $205 from J.P. Morgan, $200 from Bank of America, and $ 185 from Morgan Stanley. However, geopolitics and rates are likely to obscure everything for a while. Hang tight!

Earnings, What’s Next?

The reporting season – with 25% of S&P 500 companies having reported – is about to enter a crucial week. Here’s a list of companies reporting this week, highlights include Microsoft, Alphabet, and AMD (Tuesday, After Close); MasterCard (Wednesday, Before Open); Apple, Amazon, and Meta (Thursday, After Close). Once again, earnings will be paramount, as they can swing the market either way. Fasten your seat belts, please!

Source: Earnings Whispers

Market Considerations

Source: Topdown Charts, LSEG

Revenue growth estimates for 2024 are forecasted to grow by 5.4% (5.5% on Dec 31st) and earnings growth estimates for 2024 are predicted to grow by 11.6% (11.7% on Dec 31st), so the future looks bright. 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 March or May. 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 a recession, which we’ll likely hear less and less (while paying a lot of attention to the data) until November, as the current US Government has indeed been a big spender of late.

On the economy, 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. Obviously, we should not overlook geopolitical scenarios and the upcoming elections, in which possibly the UK will see the first Labour government since the Tony Blair-Gordon Brown years, albeit immersed in a global shift to the right (more protectionism, less globalisation). 

Both the S&P 500 and the Nasdaq 100 made new all-time highs last week; that of the tech-heavy index was remarkable after the strong performance in 2023. Europe made a remarkable comeback, and Japan (minus the JPY) stole the show this year. I continue to recommend a long position in equities (with the now famous 3% weekly stop), and I’m warming up on bonds as these reach interesting yields. 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 indeed came more slowly than expected. It should continue in 1H24, but watch out for potential spanners in the works, like the issues in the Red Sea. 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 starting buying bonds in waves, keeping the overall duration below 10 years. Obviously, it still makes sense to invest any liquidity in the money market (up to 1/2 years).

Don’t neglect Japan – it is the more investable part of equities right now (together with US Equities, of course), thanks to good economic performance and a still dovish Central Bank. This week’s chart that the Nikkei 225’s performance is based on solid fundamentals as Nominal GDP has stormed past a 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. Watch out for any ‘surprises’ coming out of the BOJ this week.  It is still the safest part of equities, as long as you hedge the JPY. 

Happy trading and see you next week!

InflectionPoint

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