One step forward, two steps back – rates go back higher, equities in a lull, and bonds down. Nasdaq shines on Oracle’s results but then takes a break again – can value take up its leadership? Key week for the central banks as they can reveal further details about when they can start easing, with a few signs that the economy is weakening. 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. 

Major market events 18th – 22nd March 2024 

Highlights for the week

Mon: EU CPI, EU Trade Balance  

Tue: AU RBA Interest Rate Decision, JP Industrial Production, EU ZEW Economic Sentiment, JP BOJ Interest Rate Decision, US Atlanta Fed GDPNow 

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

Thu: CH SNB Interest Rate Decision, DE Services PMI, EU Services PMI, UK Services PMI, UK BOE Interest Rate Decision, US Philly Fed Manufacturing Index, US Jobless Claims, US Services PMI, JP CPI   

Fri: UK Retail Sales, DE Ifo Business Climate Index, US Fed Chair Powell Speaks 

Performance Review

Index	8/3/2024	15/3/2024	WTD	YTD
Dow Jones	38,722.69	38,714.77	-0.02%	2.65%
S&P 500	5,123.69	5,117.09	-0.13%	7.89%
Nasdaq 100	18,018.45	17,808.25	-1.17%	7.65%
Euro Stoxx 50	4,961.11	4,986.02	0.50%	10.49%
Nikkei 225	39,649.92	38,710.20	-2.37%	16.29%

Source: Google

InflectionPoint reports:

* One step forward, two steps back. Markets were in a reflective mood last week, which saw rates rise, bonds retreat, and equities take a pause from the recent strong performance. Value shone again, and Europe continued on a roll by being the star market of the week. Oracle had a strong report on Monday which propelled stocks further, but as earnings are drawing to an end, attention is shifting to what the central banks might do amid speculation that the Bank of Japan is ready to end its negative rates paradigm. Next week will be loaded with Interest Decisions from three major central banks: the Bank of Japan, the Federal Reserve, and the Bank of England – apart from the BOJ, everyone else will be expected to maintain the current rates. The door is still open for central banks to ease rates starting from June (in all likelihood) and into the second part of the year, but the timing is less certain as inflation is taking a long time to return to their desired targets. In Japan, it looks as though the first hike has been already digested by the markets, with the focus on what the BOJ might do next after its first hike. 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 level of 20.6x.  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. This week will be very important with the central banks in focus: attention will be on what they will say regarding the outlook for the economy and when they will begin to cut rates. I will look at the data very carefully to possibly update my view next week – and always bear in mind the 3% weekly stop! 

* Another week, another win for value. Growth and value have been in a tug of war lately, with the latter moving from strength to strength recently. 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 March or 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 Nike, 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. Rates were strong last week with yields rising; tough week, but Tom and I continue to like US Treasuries here.  

*  March was once looked to as the first opportunity for the Fed to cut; we are now there and there is no chance of that happening (1%). It now also looks as if chances for an ease to start in May are very slim, with just a 5.3% likelihood. My own bet is still in June, in which chances of a cut are 58.5%, down from 73.8% last week, but I would not be shocked if the Executive Committee decided to wait until July. The timeline for a move by the ECB looks firmly to 2H24. 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 4.29%, with a sharp increase l last week; yields in Europe also rebounded further, and the EUR declined against the USD, moving it back from 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 1Q24 are currently estimated at 3.3%, vs 5.7% on Dec 31st, and last week’s results showed that most of corporate America is doing just fine. The current forward P/E ratio for the S&P 500 is 20.6x – 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 244.27 little changed from 244.19 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 276.74. Savita Subramanian of BofA recently 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 2.3%, revised down from last week’s 2.5%, 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 significant cut and now sees annual growth in 1Q24 at 1.78%, up from 2.14% last week, and down from 2.05% in December. There is still no recession forecast in their model, up to one sigma, but I wonder if this further reduction is an early signal that the US Federal Reserve should start reducing rates? Introducing a 2Q24 forecast with a growth of 2.09%, also with a significant decline from last week. Earnings are expected to come in at 3.3% in 1Q24, compared with a forecast of 5.7% as of Dec 31st.  Revenue growth is faring even better, at 3.5% in 4Q23, vs 4.3% 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 is now drawing to an end. Here is a snapshot of companies reporting next week! Watch out for Nike and FedEx, which report on Thursday, After Close.

Source: Earnings Whispers

Market Considerations

Source: FactSet

Source: FactSet

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 5.9% (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 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. Meanwhile the upcoming US Presidential election will be a rematch of 2020’s fight between Trump and Biden. 

The highlight this week is on AI, which is becoming more and more important and harder to get into. The news that Apple might introduce Google’s Gemini AI in its iPhones is almost incredible; it shows Apple’s inability to produce a firm contender and the need to go to one of the two top market players for help (it has been reported that Apple first held discussions with Open AI about the same). At the same time, Apple without AI is looking like a value stock; maybe it’s worth switching some money into Salesforce.com? (as Nvidia is too hot to touch). 

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, 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. Given the comment on Apple and the decline in its shares, we are really considering switching a 1% weight between Apple and Salesforce.com. 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. Introducing the third portfolio on Italian Equities. 

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

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

https://www.wikifolio.com/en/int/w/wf00ipiteq

Happy trading and see you next week!

InflectionPoint

Disclaimer

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