Strong equity performance brings the market back from a possible breaking point – rates finally down, and bonds up. Can technology continue to outperform the S&P 500? In the long term I would think so, so stay long. We are 3/4 months away from Central Banks easing – a powerful tailwind. 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 25th – 29th March 2024 

Highlights for the week

Mon: EU ECB Chair Lagarde Speaks  

Tue: JP BOJ Core CPI, SP GDP, US Core Durable Goods Orders, US Consumer Confidence, US Atlanta Fed GDPNow 

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

Thu: UK GDP, DE Retail Sales, DE Unemployment, US GDP, US GDP Price Index, US Jobless Claims, CA GDP, US Chicago PMI    

Fri: UK, IT, BE, PT, IR, FR, DE, SG, CA, FI, HK, NO, AU, ZA, BR, IN, SP, NZ, SW, CH, GR, US Good Friday – Markets Closed, US Fed’s Balance Sheet, JP CPI, JP Industrial Production, FR CPI, FR PPI, US Core PCE Price Index, US Fed Chair Powell Speaks

Performance Review

Index	15/3/2024	22/3/2024	WTD	YTD
Dow Jones	38,714.77	39,475.90	1.95%	4.67%
S&P 500	5,117.09	5,238.18	2.16%	10.36%
Nasdaq 100	17,808.25	18,339.44	1.78%	10.86%
Euro Stoxx 50	4,986.02	5,031.15	1.41%	11.49%
Nikkei 225	38,710.20	40,008.57	0.90%	20.19%

Source: Google

InflectionPoint reports:

* I admit, I have been uneasy about the markets in the last 2 weeks. With technology seemingly having lost its leadership, and the ever-present danger of inflation, equities looked like a rudderless ship only poised to go down. And yet, amid all uncertainty I didn’t change my recommendation, and I won’t change it now – long equities, and long bonds. Both the S&P and the Nasdaq 100 made new records last week, but what I feel was most important was the resilience of the overall market, visible in the very close performance YTD of these two landmark indices. It was a week in which growth led again (despite the lackluster performance of the Nasdaq), but in which value did not do badly at all. Japan put an end to its negative rates experiment which lasted since 2007, and the BOJ, spurred by wage hikes demand, might hike again before the end of the year. As for the Fed, they repeated that ‘easing can start this year’; but it looks as though the Executive Committee is divided on that front, as some members see 3 eases this year, and others only one. At this point in time, the CME FedWatch tool sees 3/4 cuts by December 2024. To most market pundits the (equities) markets feel extended, and rightly so – as on Friday the S&P 500’s multiple reached a recent record of 20.9x.  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, its moves will be closely related to the BOJ’s decisions. This week will be very important with the UD GDP on Thursday, and the US Core PCE Price Index (the Fed’s preferred measure of inflation) on Friday while the markets will be closed to honour Good Friday.

* Growth and value have been in a tug of war lately, with the latter moving from strength to strength recently; and last week continued in this stride. 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. The first major change in monetary policy took place last week with the BOJ; the SNB surprised with a 25bp cut that the market was not expecting, and other major central banks (Fed, ECB, and BOE), while currently holding rates, have all reached their top in rates and they are all looking to ease at some point. It is now the end of March, and June (or July) are only 3/4 months away. 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. Nike did disappoint, but I would think this is more company specific than an alarm about corporate America’s future performance. 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 came down a bit last week; Tom and I continue to like US Treasuries here.  

*  So March is now behind us and we are looking at May, albeit with scant hopes (10.8%). My own bet is still in June, in which chances of a cut are 75.1%, up from 58.5% last week, but I would not be shocked if the Executive Committee decided to wait until July. I also note that these forecasts are highly linked to the upcoming data; US GDP on Thursday, and even more so the US Core PCE Price Index on Friday can have a significant impact on yields and on future rate expectations. 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 4.21%, with a mild decrease last week; yields in Europe also declined 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 3.4%, vs 5.7% on Dec 31st, and the recent results showed that most of corporate America is doing just fine. The current forward P/E ratio for the S&P 500 is 20.9x – 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 243.55 little changed from 244.27 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 275.97.

* 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 2.1%, revised down from last week’s 2.3%, 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 1.90%, up from 1.78% last week, albeit 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 2.19%, also a little bit better from last week. Earnings are expected to come in at 3.4% in 1Q24, compared with a forecast of 5.7% as of Dec 31st.  Revenue growth is faring even better, at 3.6% in 1Q24, vs 4.3% as of Dec 31st. For 2023, earnings growth is forecasted at 1.0%, 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: BofA Global Investment Strategy, GFD Finaeon, Bloomberg, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.1% (5.6% on Dec 31st) and earnings growth estimates for 2024 are predicted to grow by 10.9% (11.4% on Dec 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.1% (5.6% on Dec 31st) and earnings to grow by 13.3% (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 tech’s outperformance versus the S&P 500, which never before reached these levels. I continue to believe that technology will be of paramount importance in our lives. While of course there are several market factors (first among them the shift to value) that could dent the massive overperformance versus the market, in the last 25 years, since the previous dot.com boom, technology has made further inroads in our life in a way that could never be thought at the time: videoconferencing and the iPhone, iPad, and Apple Watch were born after then, with applications rapidly expanding in the field of medicine. Especially for investors who have a medium to long-term investment outlook, technology is one not to leave behind. is becoming more and more important and harder to get into.  

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 an encore from the S&P, the Nasdaq 100, and the Nikkei 225, which all rose to recent highs. 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. Again, Unicredit has been left out intentionally to quash any possible suspicion, but I wish the company and its management team the best for the future. 

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

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.