Up, up, and away … Europe shines, other markets take a breather … still some clouds remain … Nasdaq (and Growth) showing its first signs of fatigue: this week’s CPI and PPI can make or break them. Europe was the only major equity market to be up last week and it is still outperforming the US on a YTD basis; 10-year Treasuries made a decent gain last week as rates finally nudged lower. Keep a long position in equities (with a 3% weekly stop), and continue to purchase some bonds as yields are headed lower. 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 US CPI on Tuesday, and PPI on Thursday, two possible game-changers. 

Major market events 11th – 15th March 2024 

Highlights for the week

Mon: JP GDP, JP GDP Price Index, JP PPI 

Tue: UK Unemployment Rate, DE CPI, US CPI, US Core CPI 

Wed: UK GDP, UK Industrial Production, EU Industrial Production

Thu: CH PPI, US PPI, US Retail Sales, US Jobless Claims, US Fed Balance Sheet  

Fri: FR CPI, US NY Empire State Manufacturing Index, US Industrial Production, US Capacity Utilization 

Performance Review

Index	1/3/2024	8/3/2024	WTD	YTD
Dow Jones	39,087.38	38,722.69	-0.93%	2.67%
S&P 500	5,137.08	5,123.69	-0.26%	8.03%
Nasdaq 100	18,302.91	18,018.45	-1.55%	8.92%
Euro Stoxx 50	4,894.86	4,961.11	1.35%	9.93%
Nikkei 225	39,937.01	39,649.92	-0.72%	19.11%

Source: Google

InflectionPoint reports:

* An eventful week for bonds and rates, albeit much less so for equities. Last Friday’s Nonfarm payrolls came again ahead of consensus, although the unemployment rate ticked higher to 3.9%. With 4Q23 reports almost over, the attention is moving on to 2024 and when the Fed might cut (my bet is still the same: June). The ECB held rates steady while acknowledging that inflation is declining and the economy remains weak; it will be data-dependent in determining when and if to ease. Meanwhile, the European Index led all markets last week, widening its YTD gap over its American peers. Japan might have reached a near-term top, with the possible rate hike in April due to bolster the JPY and be a negative for the Nikkei 225 and the Topix. 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, largely thanks 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. 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 20.7x, 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 for the JPY, its moves will be closely related to the BOJ’s decisions. Finally, please note that Goldman Sachs is bullish on the JPY vs the USD on a 12-month basis, on the different outlooks for the American and the Japanese Central Banks. This week will be very important with the US CPI on Tuesday and the US PPI on Thursday – they could either revive the market’s recent weakness or start a correction that some see as inevitable. I will look at the data very carefully to possibly update my view next week – and always bear in mind the 3% weekly stop! 

* Growth and value have been in a tug of war lately, and during last week value was clearly out in force. 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. Given that the first likely move in monetary policy will happen as soon as April, with the BOJ forecasted to exit its negative rates, attention has switched back to monetary policy – and it will get worse for the markets (with a hike) before it gets better (when the Fed and the ECB will likely ease).  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). Bonds had a huge rally last week and possibly the peak in yields on US Treasuries is behind us – so stay long and strong. 

*  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 3%. 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 25.2%. My own bet is still in June, in which chances of a cut are 73.8%, up from 71% 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 4.06%, with another decline last week; while yields in Europe also declined further (particularly in the periphery), the EUR advanced against the USD, pushing it towards 1.10.  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 4.1%, vs 1.5% on Dec 31st, and last week’s results showed that most of corporate America is indeed doing just fine. The current forward P/E ratio for the S&P 500 is 20.7x – 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 244.19 little changed from 243.82 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 276.70. As mentioned before, Savita Subramanian of BofA increased her forecast for the S&P 500 to 5,400. 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, with the latter starting its forecast for 2Q24. Looking at 1Q24, the former’s GDPNow model is forecasting growth of 2.5%, revised down from last week’s 2.1%, 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 in 1Q24 at 2.14%, up from 2.12% last week, and up from 2.05% in December. Even more interestingly, there is no recession forecast in their model, up to one sigma. Introducing a 2Q24 forecast with a growth of 2.52%. Earnings are expected to come in at 4.1% in 4Q23, revised upwards from 4.0% last week, and compared with an estimate of 1.5% as of Dec 31st.  Revenue growth is faring even better, at 4.1% 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 > 99% of S&P 500 companies having reported – is now drawing to an end. Here is a snapshot of companies reporting next week! Watch out for Oracle, which reports on Monday, After Close, and Adobe, on Thursday, After Close.

Source: Earnings Whispers

Market Considerations

Source: FactSet

Source: Goldman Sachs, 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% (11.3% 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 on recession and GDP. The first chart shows us that fewer and fewer companies are mentioning the word recession in their earnings calls. The second is Goldman Sachs’ forecast on GDP Growth, which sees the American Investment Bank well ahead of the consensus. The strength of the economy is not going away. Unfortunately, valuations are not going any lower, too. Let’s see which of these two will be the first to yield. Throw in the Fed’s easing prospects later this year and this makes an interesting mix.

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). 

Last year there was a break for the S&P, the Nasdaq 100, and the Nikkei 225. 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, 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 (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. Watch out for the JPY as it might have reached a top against major currencies and can recover from low levels as the BOJ enacts its monetary policy of exiting negative rates.

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 in the portfolios last week: Tom and I are still debating when we will reach the top in equities. 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.