In-line PCE Index renews hopes that the Fed will eventually cut. Good earnings in the US and a more favourable macro backdrop propel the S&P 500 and the Nasdaq 100 to a record. Japan is on a roll, storming ahead of its previous historic records. Europe outperforms the US on a YTD basis; 10-year Treasuries gained a little last week as rates finally nudged lower. Keep a long position in equities (with a 3% weekly stop), and start purchasing some bonds (max 10% of invested capital), but hold the bulk of your fire as yields on the 10-year Treasuries get close to 4.50%. 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. Watch out for interesting ADP Payrolls on Wednesday, and Nonfarm Payrolls on Friday, two possible game-changers. 

Major market events 4th – 8th March 2024 

Highlights for the week

Mon: JP Capital Spending, CH CPI, SP Unemployment Change, JP CPI

Tue: JP Services PMI, EU Services PMI, UK Services PMI, EU PPI, US Services PMI, US ISM Non-Manufacturing PMI   

Wed: AU GDP, DE Trade Balance, UK Construction PMI, UK Spring Budget, US ADP Nonfarm Employment Change, CA BOC Interest Rate Decision, US JOLTs Job Openings, US Fed Chair Powell Testifies, US Atlanta Fed GDPNow. US Beige Book

Thu: CN Trade Balance, DE Factory Orders, EU ECB Interest Rate Decision, US Trade Balance, US Jobless Claims, US Fed Chair Powell Testifies, JP Household Spending,   

Fri: DE PPI, EU GDP, US Nonfarm Payrolls, US Average Hourly Earnings, US Unemployment Rate 

Performance Review

Index	26/2/2024	1/3/2024	WTD	YTD
Dow Jones	39,131.53	39,087.38	-0.11%	3.64%
S&P 500	5,088.80	5,137.08	0.95%	8.31%
Nasdaq 100	17,937.61	18,302.91	2.04%	10.64%
Euro Stoxx 50	4,872.57	4,894.86	0.46%	8.47%
Nikkei 225	39,098.68	39,937.01	2.14%	19.97%

Source: Google

InflectionPoint reports:

* Who other than Lt. Columbo can solve the mystery that was last week? The suspect is always the same: inflation! Just when we had a flurry of negative reports, last Thursday the Fed’s preferred measure of inflation, the PCE (Personal Consumption Expenditures) Price Index came in line at 2.4% when most market pundits feared a far worse outcome. That, once again, put the spotlight on the Fed, with inflation now nearing their 2% target. Yields declined slightly in the US, while they rose slightly in Europe. This week the semi-annual testimony of Fed Chair Powell will be key in finding further insights on when the US Central Bank might start to ease, plus the ever-so-important Nonfarm Payrolls on Friday. Meanwhile, the S&P 500, the Nasdaq 100, and the Nikkei 225 rose to new all-time records, the Dow Jones is fighting for relevance despite adding Amazon to its components, and Europe managed to defend its YTD performance lead vs America. Many forecasters expect the US Central Bank to start easing later (May or June), and some are reducing the amount of cuts factored in during the year as inflation proves to be sticky, thanks in large part to a buoyant economy. This could open up a period where European stocks perform better than their American counterparts, thanks to milder inflation, while the USD is still supposed to be strong. As for Japan, the weakness in the JPY still points to more upside for the local stock market, particularly considering the Asian nation is very strong in exports, although the downside might be more limited by increasing rumours of an interest rate hike in April.  To most market pundits the (equities) markets feel extended, and rightly so – as on Thursday the S&P 500’s multiple reached a multiple of 20.4x, a recent record.  Still long equities, if the ECB does eventually cut before the Fed then stay long USD, although the latest measure of US Inflation has swung that likelihood back to 50/50, 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 (now on key support levels against all major currencies, even considering a possible rate hike in April). 

* And when you thought growth had thrown in the towel, it had a massive resurgence last week, trumping value, with the Dow Jones on a negative weekly performance, while the other two major US indices rose to new records. Japan is benefitting from lower valuations than its US Counterparts and from a solid economy that might about resolve its chronic disinflation problem.  Furthermore, the relevance of the Asian country might further increase thanks to the expertise in technology (semiconductors) as the world embraces the power of AI. The US PCE Index was a nice surprise and that had its impact on when the Fed might ease – centering in June. In the UK, the Spring Budget will be the last chance for the current Conservative government to try to counter Labour’s landslide advantage in the polls.  The reporting season in the US is almost finished, and attention will soon switch to those companies, like Oracle, who have a non-traditional fiscal year and report a month early, to get some insights about how 2024 has been treating corporate America so far. 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). Meanwhile, it is fine to be long equities (always with the weekly 3% stop), considering that US strategists are continuously increasing their year-end price target for the S&P 500, (the latest one was BofA’s Savita Subramanian with a year-end target of 5,400) 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). Tom switched all his 5% in short-term debt to US 30-year bonds, and he would be pounding the table once the top has been reached. Probably that means more towards 4.50% than anything else (my own take, not his, for what it’s worth). Anyway, yields were a little lower last week, offering bondholders a much-needed respite.

*  March is now toast, and we are looking forward still to the first Fed cut. Once touted as the first possible month for the US Central Bank to ease, according to the CME FedWatch Tool, now is a no-brainer as the chances of a cut are down to just 5%. While esteemed Goldman Sachs’ Chief Economist Jan Hatzius still thinks that the first cut will take place in May, the market is betting against it, as chances of easing are now just 28%. My own bet is still in June, in which chances of a cut are 71%, up from 66.7% last week, but I would not be shocked if the Executive Committee decided to wait until July. 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. Considering the shift to value, it does make sense to increase that part of the portfolio, as Goldman Sachs’ Chief US Strategist David Kostin recommended. 

* Yields on US 10-year Treasuries have reached 4.20%, with a small decline last week. If anything lately they have tended to go up other than down, bolstering the dollar.  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 4Q23 are currently estimated at 4.0%, up from 3.2% last week and from -1.4% (!) four weeks ago, and last week showed that most of corporate America is indeed doing just fine. The current forward P/E ratio for the S&P 500 is 20.4x – and while it is higher both than the 5-year (19.0x) average and the 10-year average (17.7x), 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 243.82 little changed from 243.29 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 276.45. As mentioned before, Savita Subramanian of BofA increased her forecast for the S&P 500 to 5,200. The bears (J.P. Morgan and Morgan Stanley) are presently having a bad time.

* Growth is still plentiful according to Atlanta and New York Federal Reserve Banks, although we had a negative revision from both last week. Looking at 1Q24, the former’s GDPNow model is forecasting growth of 2.1%, revised down from last week’s 2.9%, with the Blue Chips consensus around 2.0% and converging with their latest forecast. The latter’s Nowcast, also unchanged from last week, which produces an annual forecast that is less volatile, also saw a trim and now sees annual growth at 2.30%, down 0.50% from last week, albeit up 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 4.0% in 4Q23, revised upwards from 3.2% last week, and compared with an estimate of 1.5% as of Dec 31st.  Revenue growth is faring even better, at 4.2% in 4Q23, vs 3.1% as of Dec 31st. For 2023, earnings growth is forecasted at 0.9%, vs 0.9% as of Dec 31st, with revenues coming in at 2.8%, 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 (January 2025) to 65.03%, 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. However, geopolitics and rates are likely to obscure everything for a while. Hang tight!

Earnings, What’s Next?

The reporting season – with > 97% of S&P 500 companies having reported – is now drawing to an end. Here is a snapshot of companies reporting next week! 

Source: Earnings Whispers

Market Considerations

Source: Carson Investment Research, FactSet, Ryan Detrick

Source: Carson Investment Research, YCharts, Ryan Detrick, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.5% on Dec 31st) and earnings growth estimates for 2024 are predicted to grow by 11% (11.5% on Dec 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.8% (5.6% on Dec 31st) and earnings to grow by 13.2% (12.7% on Dec 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 May, June, or July. 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.

The highlight this week is earnings. These have doubled in the last 10 years and are looking to continue their meteoric rise. So while the multiples are high by a historic standard, earnings are driving the growth of Corporate America and of the S&P 500. The second highlight is on market timing, with Ryan Detrick reminding us that March has been a strong month lately. particularly in the last 20 years. Let’s see if the latest employment data coming this week will confirm this positive trend. 

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 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). 

We witnessed new all-time records for the S&P, the Nasdaq 100, and the Nikkei 225 last week. 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 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. 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. 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. 

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!

Tom switched 5% of short-term debt into 30-year US bonds. In equities, we switched Monster to Pepsico. Finally, 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. A third portfolio has been launched on Italian Equities and is still in a test phase. As soon as it will be published, I’ll add its link here.

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

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

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.